Maximum likelihood estimation of deposit insurance value with interest rate risk

This paper develops a maximum likelihood estimation method for the deposit insurance pricing model of Duan, Moreau and Sealey (DMS) [J. Banking Financ. 19 (1995) 1091.]. A sample of 10 US banks is used to illustrate the estimation method. Our results are then compared to those obtained with the modified Ronn-Verma method used in DMS. Our findings reveal that the maximum likelihood method yields estimates for the deposit insurance value much larger than the ones based on the modified Ronn-Verma method. We conduct a Monte Carlo study to ascertain the performance of the maximum likelihood estimation method. The simulation results are clearly in favor of our proposed method. © 2002 Elsevier Science B.V. All rights reserved