Interval Pricing Study of Deposit Insurance in China

Abstract

This paper first proposes a European option pricing method for deposit insurance based on triangular intuitionistic fuzzy numbers. In the proposed method, we take into account the randomness and fuzziness of bank asset value simultaneously, and hence, the method can adequately reflect the high uncertainty of bank asset value. This method fuzzifies the value of bank asset, resubmits it into the original deposit insurance option pricing model as a fuzzy random variable, and then gives an analytic formula of deposit insurance rates using a risk-neutral method. After this, we have also conducted a numerical analysis. In specific, we have obtained the premium interval and presented the static analysis of key parameters. Finally, seven small- and middle-sized banks in Hunan Province in China are used as examples to validate the proposed interval pricing model. The Black-Scholes option pricing model and Yoshida’s triangular fuzzy model are also employed for comparison. The research results show that the interval rates obtained from the proposed European option pricing method for deposit insurance can better reflect the uncertainty of bank asset evaluation than the fixed rates obtained from the Black-Scholes option pricing model. Moreover, the model proposed in this paper is also superior to Yoshida’s model in practice.

Fuzzy Random Option Pricing in Continuous Time: A Systematic Review and an Extension of Vasicek’s Equilibrium Model of the Term Structure

“…Other residual applications of FROPCT to asset valuation include assessing firms' value [74], as suggested by the seminal work of Black and Scholes [4], credit default swaps [66,67], bank deposit insurance [65], catastrophe bonds [88], and forward contracts in energy markets [84].…”

A Fuzzy-Random Extension of Jamshidian’s Bond Option Pricing Model and Compatible One-Factor Term Structure Models

“…In discrete time, we can mention the contributions [40,41,43,[50][51][52]. Other applications of FROP to asset valuation include assessing firms' values [27], as suggested by the seminal work [1], credit default swaps [53,54], bank deposit insurance [55], catastrophe bonds [56], and forward contracts in energy markets [57]. It is striking that FROP extensions to equilibrium models of the term structure or interest-rate derivative valuation models are scarce.…”

Fuzzy Random Option Pricing in Continuous Time: A Systematic Review and an Extension of Vasicek’s Equilibrium Model of the Term Structure

“…Other residual applications of FROPCT to asset valuation include assessing the firms' value [50], as suggested by the seminal work of Black and Scholes [3]; credit default swaps [47,48]; bank deposit insurance [45]; catastrophe bonds [69]; and forward contracts in energy markets [67].…”