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Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

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  • Kim, Hwa-Sung
  • Kim, Bara
  • Kim, Jerim

Abstract

A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.

Suggested Citation

  • Kim, Hwa-Sung & Kim, Bara & Kim, Jerim, 2014. "Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses," Economic Modelling, Elsevier, vol. 41(C), pages 15-22.
    • Handle: RePEc:eee:ecmode:v:41:y:2014:i:c:p:15-22
    DOI: 10.1016/j.econmod.2014.04.007
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    References listed on IDEAS

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    1. Lin, X. Sheldon & Wang, Tao, 2009. "Pricing perpetual American catastrophe put options: A penalty function approach," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 287-295, April.
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    Cited by:

    1. Bi, Hongwei & Wang, Guanying & Wang, Xingchun, 2019. "Valuation of catastrophe equity put options with correlated default risk and jump risk," Finance Research Letters, Elsevier, vol. 29(C), pages 323-329.

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