Catastrophe Risk Bonds
نویسندگان
چکیده
We examine the pricing of catastrophe risk bonds. Catastrophe risk cannot be hedged by traditional securities and thus the pricing of catastrophe risk bonds must be examined in an incomplete markets setting and therefore entails special difficulties in the pricing methodology. We present techniques for pricing these bonds and discuss this theory in the context of equilibrium pricing and its relationship to the standard arbitragefree valuation framework. It is found that a general pricing approach may be developed based on the prescription of a term structure model and a probability structure for the catastrophe risk exposure. The pricing methodology can also be used to assess the relative default spread on catastrophe risk bonds compared with traditional defaultable securities. "It is indeed most wonderful to witness such desolation produced in three minutes of time." Charles Darwin commenting on the February 20, 1835 earthquake in Chile.
منابع مشابه
Improving Risk Allocation Through Cat Bonds
Catastrophe bonds (cat bonds) often use index triggers, such as, for instance, parametric descriptions of a catastrophe. This implies the problem of the so-called basis risk, resulting from the fact that, in contrast to traditional reinsurance, this kind of coverage cannot be a perfect hedge for the primary’s insured portfolio. On the other hand, cat bonds offer some very attractive economic fe...
متن کاملRisk and Valuation of Mortality Contingent Catastrophe Bonds
Catastrophe Mortality Bonds are a recent capital market innovation providing insurers and reinsurers with the possibility to transfer catastrophe mortality risk off their balance sheets to capital markets. This article introduces a time-continuous model for analyzing and pricing catastrophe mortality contingent claims based on stochastic modeling of the force of mortality. In addition, we give ...
متن کاملPricing the risk–transfer financial instruments via Monte Carlo methods
Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work. Abstract The paper is devoted to nding the present value of catastrophe bonds using a combination of Monte Carlo and ...
متن کاملCatastrophe Insurance Modeled by Shot-Noise Processes
Shot-noise processes generalize compound Poisson processes in the following way: a jump (the shot) is followed by a decline (noise). This constitutes a useful model for insurance claims in many circumstances; claims due to natural disasters or self-exciting processes exhibit similar features. We give a general account of shot-noise processes with time-inhomogeneous drivers inspired by recent re...
متن کاملCatastrophe bonds and financial risk: Securing capital and rule through contingency
This paper uses the example of catastrophe bonds to investigate how exposures to geophysical, biological, and meteorological catastrophic events are constituted as securitizable and exchangeable financial risks in the insurance-linked securities (ILS) market. It discusses the techniques of catastrophe modeling as a pivotal mobile methodology for the calculation and creation of contingent assets...
متن کامل