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Catastrophe risk bonds with applications to earthquakes

Content Provider	Springer Nature Link
Author	Shao, Jia Pantelous, Athanasios Papaioannou, Apostolos D.
Copyright Year	2015
Abstract	Catastrophe (CAT) risk bonds provide a solid mechanism for direct transfer of the financial consequences of extreme events (hazards) into the financial market. During the past two decades, insurance companies have been searching for more adequate liquidity funds as a consequence of increasing losses due to climate change and severe natural disasters. The aims of this study were twofold. First, we study the pricing process for CAT bonds for the structure of $$n$$ financial and $$m$$ catastrophe-independent risks. Second, to illustrate the applicability of our results, an application for earthquakes is considered using extreme value theory. As a numerical example, a CAT bond with historical data from California is proposed in which the magnitude, latitude, longitude, and depth are included in the model. In addition, appropriate models are constructed for the term structure of interest and inflation rate dynamics, and a stochastic process for the coupon rate. Finally, on the basis of analysis for the aforementioned catastrophe and financial market risks, we can use equilibrium pricing theory to find a certain value price for the CAT California earthquake bond.
Starting Page	113
Ending Page	138
Page Count	26
File Format	PDF
ISSN	21909733
Journal	European Actuarial Journal
Volume Number	5
Issue Number	1
e-ISSN	21909741
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2015-03-03
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	CAT risk bonds Extreme value theory Equilibrium pricing Earthquakes California data Quantitative Finance Finance/Investment/Banking Applications of Mathematics Game Theory, Economics, Social and Behav. Sciences
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Economics and Econometrics Statistics, Probability and Uncertainty

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