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Calibration of Parametric CAT bonds. A case study of Mexican earthquakes

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Author Info
Wolfgang Karl Härdle
Brenda López Cabrera

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Abstract

The study of natural catastrophe models plays an important role in the prevention and mitigation of disasters. After the occurrence of a natural disaster, the reconstruction can be financed with catastrophe bonds (CAT bonds) or reinsurance. This paper examines the calibration of a real parametric CAT bond for earthquakes that was sponsored by the Mexican government, which is based on the estimation of the intensity rate of the arrival process of earthquake (which would trigger this particular CAT bond) from the two sides of the contract: the reinsurance and the capital markets. Additionally, the intensity rate from the historical data was estimated to conduct a comparative analysis. The results demonstrate that, under specific conditions, the financial strategy of the government, a mix of reinsurance and CAT bond, is optimal in the sense that it provides coverage of USD 450 million for a lower cost than the reinsurance itself.

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File URL: http://www.atypon-link.com/DH/doi/pdf/10.3790/schm.128.4.615
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Publisher Info
Article provided by Duncker & Humblot, Berlin in its journal Schmollers Jahrbuch.

Volume (Year): 128 (2008)
Issue (Month): 4 ()
Pages: 615-630
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Handle: RePEc:aeq:aeqsjb:v128_y2008_i4_q4_p615-630

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Find related papers by JEL classification:
G19 - Financial Economics - - General Financial Markets - - - Other
G29 - Financial Economics - - Financial Institutions and Services - - - Other
N26 - Economic History - - Financial Markets and Institutions - - - Latin America; Caribbean
N56 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - Latin America; Caribbean
Q29 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Other
Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters

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This page was last updated on 2009-11-3.

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