Scandinavian Working Papers in Business Administration
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2008/8: Continuous Monitoring: Look before You Leap
Snorre Lindset () and Svein-Arne Persson ()
Additional contact information
Snorre Lindset: Trondheim Business School, Postal: HiST, TØH, Jonsvannsveien 82, 7004 TRONDHEIM, Norway
Svein-Arne Persson: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Abstract: We present a model for pricing credit risk protection for a limited liability non-life insurance company. The protection is typically provided by a guaranty fund. In the case of continuous monitoring, i.e., where the market values of the company's assets and liabilities are continuously observable, and where the market values of assets and liabilities follow continuous processes, the regulators can liquidate the insurance company at the instant the market value of its assets equals the market value of its liabilities, implying that the credit protection is worthless. When jumps are included in the claims process, the protection provided by the guaranty fund has a strictly positive market value. We argue that the ability to continuously monitor the equity value of a company can be a new explanation for why jump processes may be important in models of credit risk.
Keywords: Credit risk for non-life insurers; guarantee fund; continuous monitoring; barrier options
21 pages, March 12, 2008
Full text files
163930
- Norwegian School of Economics, Department of Business and Management Science
- Ordering Working Papers
- Home page for this series
Questions (including download problems) about the papers in this series should be directed to Stein Fossen ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:nhhfms:2008_008This page generated on 2024-11-12 04:36:01.