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A Welfare Analysis of Capital Insurance

Listed author(s):
  • Ekaterina Panttser

    ()

    (Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, USA)

  • Weidong Tian

    ()

    (Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, USA)

Registered author(s):

    This paper presents a welfare analysis of several capital insurance programs in a rational expectation equilibrium setting. We first explicitly characterize the equilibrium of each capital insurance program. Then, we demonstrate that a capital insurance program based on aggregate loss is better than classical insurance, when big financial institutions have similar expected loss exposures. By contrast, classical insurance is more desirable when the bank’s individual risk is consistent with the expected loss in a precise way. Our analysis shows that a capital insurance program is a useful tool to hedge systemic risk from the regulatory perspective.

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    Article provided by MDPI, Open Access Journal in its journal Risks.

    Volume (Year): 1 (2013)
    Issue (Month): 2 (September)
    Pages: 1-24

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    Handle: RePEc:gam:jrisks:v:1:y:2013:i:2:p:57-80:d:28886
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    1. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    2. Youngna Choi & Raphael Douady, 2012. "Financial crisis dynamics: attempt to define a market instability indicator," Quantitative Finance, Taylor & Francis Journals, vol. 12(9), pages 1351-1365, August.
    3. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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