FDIC Center for Financial Research Working Paper No. 2004-01
Dilip B. Madan
This paper proposes methods for obtaining risk neutral distributions when only the statistical density is observed. We employ renormalized exponential tilts and estimate the tilt coefficients from related options markets. Particular emphasis is placed on reinsurance losses for which we price in closed form using the Weibull extreme value distribution. The procedure is illustrated in detail for FDIC losses.
CFR research programs: risk measurement, deposit insurance