Actuarially Consistent Valuation of Catastrophe Derivatives
نویسندگان
چکیده
In this article, we investigate the valuation of insurance derivatives which facilitate the trading of insurance risks on capital markets, such as catastrophe derivatives that were traded at the Chicago Board of Trade. These instruments have to be priced relative to observed insurance premiums that are written on the same underlying risks to exclude any arbitrage opportunities. We derive a representation of those catastrophe derivative price processes that are actuarially consistent and determine several situations in which actuarial consistency leads to a complete market for catastrophe derivatives. JEL Classification: G12, G13
منابع مشابه
Pricing Catastrophe Insurance Derivatives
We investigate the valuation of catastrophe insurance derivatives that are traded at the Chicago Board of Trade. By modeling the underlying index as a compound Poisson process we give a representation of no-arbitrage price processes using Fourier analysis. This characterization enables us to derive the inverse Fourier transform of prices in closed form for every fixed equivalent martingale meas...
متن کاملModel Uncertainty, Ambiguity Aversion and Implications for Catastrophe Insurance Market
Uncertainty is the inherent nature of catastrophe models because people usually have incomplete knowledge or inaccurate information in regard to such rare events. In this paper we study the decision makers’ aversion to model uncertainty using various entropy measures proposed in microeconomic theory and statistical inferences theory. Under the multiplier utility preference framework and in a st...
متن کاملBasis Risk with PCS Catastrophe Insurance Derivative Contracts
This study provides evidence of the potential hedging effectiveness of insurance derivatives based on regional estimates of catastrophe losses. We estimate the percentage of insurers’ by line and state underwriting risk that could have been eliminated over the 1974 through 1994 period if they had hedged using state-specific catastrophe derivatives based on Property Claims Service (PCS) reported...
متن کاملModifying the Black-Scholes model to valuate preemption right
In this paper, we try and valuate preemption rights by modifying the Black-Scholes model, which is widely used to valuate options and other derivatives. Here we first present the basics of the Black-Scholes model and then we discus modification of the model to be fit for preemption right valuation. At the end, we valuate four of the preemptive rights using the proposed model
متن کاملThe year of the cat: taxing nuclear risk with the help of capital markets
This paper proposes new regulation for nuclear power reactors aimed at increasing their safety. We begin by describing how limited liability leads to risk-loving behaviour in nuclear power companies and unsafe nuclear power reactors. By reviewing current regulatory regimes, we show that this issue is not being sufficiently addressed today. Therefore, we evaluate five regulatory instruments: (1)...
متن کامل