Loans defaulting prematurely and the pricing of loan insurance

ZHANG Yaojie, SHI Benshan, WEI Yu, JIN Daxiang

Systems Engineering - Theory & Practice ›› 2019, Vol. 39 ›› Issue (10) : 2502-2511.

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PDF(1988 KB)
Systems Engineering - Theory & Practice ›› 2019, Vol. 39 ›› Issue (10) : 2502-2511. DOI: 10.12011/1000-6788-2018-0381-10

Loans defaulting prematurely and the pricing of loan insurance

  • ZHANG Yaojie1, SHI Benshan2, WEI Yu3, JIN Daxiang2
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Abstract

The existing academic studies always ignored the impact of premature loan default on loan default loss. The main purpose and contribution of this paper is to introduce premature default into the loan insurance pricing model, which corrects the loan insurance pricing error of only considering mature default. Based on the theory of option pricing, this paper obtains the numerical solution of the loan insurance premium of premature default through Monte Carlo simulation. The case studies and empirical results show three findings. First, when the default risk is relatively high, the loan insurance pricing model of premature default can correct the overestimate issue of the loan insurance pricing model of mature default. Second, the relationship between the loan insurance premiums of premature default and corporate default points is non-linear and inverted U-shaped. Third, the time interval of Monte Carlo simulation will affect the loan insurance pricing level of premature default, which implies the impact of information asymmetry on loan insurance pricing.

Key words

loan insurance / premature default / default point / Monte Carlo simulation

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ZHANG Yaojie , SHI Benshan , WEI Yu , JIN Daxiang. Loans defaulting prematurely and the pricing of loan insurance. Systems Engineering - Theory & Practice, 2019, 39(10): 2502-2511 https://doi.org/10.12011/1000-6788-2018-0381-10

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Funding

National Natural Science Foundation of China (71371157, 71671145); Service Science and Innovation Key Laboratory of Sichuan Province of China (KL1704); Doctoral Innovation Fund Program of Southwest Jiaotong University (D-CX201724)
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