The price of being a SIFI
Michel M. Dacorogna – SCOR Scientific Advisor

After reviewing the notion of Systematically Important Financial Institution (SIFI), we propose a first principles way to compute the price of the implicit put option that the State gives to such an institution. Our method is based on important results from Extreme Value Theory (EVT), one for the aggregation of heavy tailed distributions and the other one for the tail behavior of the Value-at-Risk (VaR) versus the Tail-Value-at-Risk (TVaR).

We show how to value in practice such an option by reconstructing the risk neutral probability from the implicit volatility of options traded in the market for the particular institution. We will conclude by a proposal to make the institution pay the price of this option to a fund, whose task will be to guarantee the orderly bankruptcy of such an institution.

Michel M. Dacorogna is SCOR scientific advisor. He conducts research in the field of insurance mathematics, capital management and risks. He is also in-volved in presenting to management and to customers SCOR models and capital management techniques.

Coauthor of: “An Introduction to High Frequency Finance”, he has also pub-lished numerous articles in scientific journals. He is an associate editor of Quantitative Finance.

He received his Habilitation, Ph. D. and M. Sc. in Theoretical Physics from the University of Geneva in Switzerland and did a post-doc at the University of California in Berkeley.