Estimating Probability Distribution of Asset Value Based on Dual Effects of Deposit Insurance with the Minimum Cross-Entropy Principle

Abstract

A model is proposed to estimate the probability distribution of asset value based on the benefit effects as well as the risk effects of deposit insurance with the minimum cross-entropy principle. Three scenarios are constructed to depict situations with different dual effects of deposit insurance. The corresponding assets distribution functions are obtained accordingly. The results show that it is positively correlated between the supervision level and the risk aversion effects of deposit insurance. The increase of the deposit insurance premium moves the bank’s assets distribution to the right side although not significantly. The asset probability distributions estimated in this paper can be taken as a reference for banks to choose the proper credit investment projects.

Share and Cite:

X. Lv, X. Qin and T. Sun, "Estimating Probability Distribution of Asset Value Based on Dual Effects of Deposit Insurance with the Minimum Cross-Entropy Principle," Theoretical Economics Letters, Vol. 3 No. 3A, 2013, pp. 23-29. doi: 10.4236/tel.2013.33A005.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] J. C. Du, A. F. Moreau and C. W. Sealey, “Fixed-Rate Deposit Insurance and Risk-Shifting Behavior at Commercial Banks,” Journal of Banking & Finance, Vol. 16, No. 4, 1992, pp. 715-742. doi:10.1016/0378-4266(92)90004-J
[2] A. Hovakimian and E. Kane, “Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994,” Journal of Finance, Vol. 55, No. 1, 2000, pp. 451-468. doi:10.1111/0022-1082.00212
[3] N. Prean and H. Stix, “The Effect of Raising Deposit Insurance Coverage in Times of Financial Crisis—Evidence from Croatian Microdata,” Economic Systems, Vol. 35, No. 4, 2011, pp. 496-511. doi:10.1016/j.ecosys.2011.01.004
[4] R. Iyer and M. Puri, “Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks,” Working Paper, The National Bureau of Economic Research (NBER), Cambridge, 2008.
[5] L. Mbarek and D. M. Hmaied, “Deposit Insurance and Bank Risk-shifting Incentives: Evidence from the Tunisian Banking System,” Journal of Money, Investment & Banking, Vol. 20, 2011, pp. 41-53.
[6] V. P. Ioannidou and M. F. Penas, “Deposit Insurance and Bank Risk-Taking: Evidence from Internal Loan Ratings,” Journal of Financial Intermediation, Vol. 19, No. 1, 2010, pp. 95-115. doi:10.1016/j.jfi.2009.01.002
[7] L. Chernykh and R. A. Cole, “Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment,” Journal of Banking & Finance, Vol. 35, No. 2, 2011, pp. 388-402. doi:10.1016/j.jbankfin.2010.08.014
[8] M. Monoyios, “The Minimal Entropy Measure and an Esscher Transform in an Incomplete Market Model,” Statistics and Probability Letters, Vol. 77, No. 11, 2007, pp. 1070-1076. doi:10.1016/j.spl.2007.01.008
[9] M. Avellanada, “Minimum Relative-Entropy Calibration of Asset-Pricing Models,” International Journal of Theoretical and Applied Finance, Vol. 1, No. 4, 1998, pp. 447-472. doi:10.1142/S0219024998000242

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.