The Cost of Deposit Insurance under Systematic Jump Risks
Chang Mo Ahn․Jaewook Chung
� Abstract �
This paper generalizes the Merton deposit insurance model to the case where jump risks cannot be eliminated in the market portfolio. The cost of deposit insurance is derived using a general equilibrium model. Since jump risk is systematic, the correlation of the underlying stock뭩 jump with the market portfolio뭩 jump affects the cost of deposit insurance. The effect of systematic jump risk on the cost of deposit insurance is too significant for the low deposit-to-asset value ratio.
Keywords : Systematic Jump Risks, Deposit Insurance, General Equilibrium JEL Classification Number : G22