DefaultRisk.com the web's biggest credit risk modeling resource. |  |
|
|
| Lévy Processes and the Financial Crisis: Can we design a more effective deposit protection? by Jessica Cariboni of European Commission, Joint Research Centre, July 2011 Abstract: Lévy processes have been applied in various financial settings to overcome the main shortcomings of the Gaussian distribution, since they allow for fat tails and jumps. In the present paper we propose to use Lévy processes to simulate the distribution of losses deriving from bank failures. The application of Levy processes is expected to provide successful results to this aim since bank failures are unexpected, rare events. We propose to use the simulated distribution of losses to design an effective Deposit Guarantee Schemes (DGSs). DGSs are financial institutions whose main aim is to provide a safety net for depositors. If a credit institution fails, depositors will be able to recover their bank deposits up to a certain limit. During the recent global financial crisis, DGSs were brought at the centre of the political and financial debate, especially due to the fact that the DGSs in the European Union ember States resulted in most of the cases incapable to react to the financial crisis, especially due to the lack of funds set aside. By simulating banks' default and the corresponding losses, our model allows defining a target level for the funds to be collected be the scheme in order to promptly and effectively respond to financial crisis and protect the citizens. The proposed approach is applied to a sample of Italian banks. Keywords: Lévy processes, Deposit insurance. Books Referenced in this paper: (what is this?)
|
Please contact me with problems or suggestions. |
