Game theoretic valuation of deposit insurance under jump risk: from too small to survive to too big to fail
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AbstractThis study examines the valuation problem in deposit insurance as a game option between the deposit insurer and the insured bank with asymmetric bankruptcy costs. The asset-to-deposit ratio of the insured bank is modeled as an exponential Lévy process with a spectrally negative jump. The study examines a wide range of scenarios in which the optimal closure policies of both parties are fully characterized. Explicit solutions are derived under the exponential jump diffusion case. This model captures several important issues in banking supervision, including the too big to fail and too small to survive phenomena, bank reorganization, and regulatory forbearance.
Acceptance Date08/08/2019
All Author(s) ListTat Wing Wong
Journal nameMathematics and Financial Economics
Year2020
Month1
Volume Number14
Issue Number1
PublisherSpringer-Verlag GmbH Germany
Place of PublicationGermany
Pages67 - 95
ISSN1862-9679
eISSN1862-9660
LanguagesEnglish-United States
KeywordsGame option, Deposit insurance, Bankruptcy cost, Lévy process

Last updated on 2020-26-10 at 00:04