Deposit Insurance Pricing Based on Heston Model and its comparison with Black-Scholes Model

Farkhondeh, Mahsa; Ghalibaf Asl, Hassan; Safdari Vaighani, Ali; Sargolzaei, Mostafa

doi:10.61186/jmbr.17.61.461

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year 17, Issue 61 (11-2024)

JMBR 2024, 17(61): 461-509

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Deposit Insurance Pricing Based on Heston Model and its comparison with Black-Scholes Model

Mahsa Farkhondeh¹

, Hassan Ghalibaf Asl ^*¹

, Ali Safdari Vaighani²

, Mostafa Sargolzaei²

1- Alzahra University
2- Allamah Tabatabaei

Abstract: (348 Views)

This study aims to price the risk-adjusted deposit insurance rate based on option pricing theory. For this purpose, 12 banks' data that were continuously active in the capital market during the period 2020-2024 were collected and analyzed. First, the deposit insurance rate was calibrated based on market risk based on the Black-Scholes model. The results indicate that the bank's deposit insurance rate varies during the years under study. The result above confirms that the deposit insurance rate of each bank should be applied and implemented in proportion to its risk. According to the existing literature, one of the shortcomings of the Black-Scholes model is considering the assumption of fixed variance, which can reduce the accuracy of the model. Therefore, in this study, to reflect a more realistic behavior of market volatility in the deposit insurance rate pricing model, the Black-Scholes model was expanded based on option pricing theory. For this purpose, the Heston stochastic volatility model was used due to its flexibility and potential to correct some of the empirical biases present in the Black-Scholes model and to more realistically reflect the behavior of market volatility in the deposit insurance rate pricing model. The results indicate that the Heston model can better reflect the behavior of market volatility in the model and provide more accurate calibrated values for the deposit insurance rate of each bank in proportion to its risk.

Article number: 4

Full-Text [PDF 1281 kb] (146 Downloads)

Type of Study: Case Study | Subject: Financial Institutions and Services (G2)
Received: 2024/10/6 | Accepted: 2025/02/4 | Published: 2025/03/4

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