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A simple robust model for Cat bond valuation

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  • Jarrow, Robert A.

Abstract

This note provides a simple closed form solution for valuing Cat bonds. The formula is consistent with any arbitrage-free model for the evolution of the Libor term structure of interest rates. The crucial inputs to the valuation formula are the likelihood of the catastrophe event, per unit time, and the percentage loss rate realized if an event occurs. The pricing methodology is based on the reduced form models used to price credit derivatives.

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File URL: http://www.sciencedirect.com/science/article/B7CPP-4YJ4ND9-1/2/ef021e3fcef045f0624ac8927792a72b
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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 7 (2010)
Issue (Month): 2 (June)
Pages: 72-79

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Handle: RePEc:eee:finlet:v:7:y:2010:i:2:p:72-79

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Web page: http://www.elsevier.com/locate/frl

Related research

Keywords: Cat bond Reinsurance Reduced form model Catastrophe events;

References

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  1. Vivek J. Bantwal & Howard C. Kunreuther, 1999. "A Cat Bond Premium Puzzle?," Center for Financial Institutions Working Papers 99-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. J. David Cummins, 2008. "CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 23-47, 03.
  3. Bakshi, Gurdip & Madan, Dilip, 2002. "Average Rate Claims with Emphasis on Catastrophe Loss Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 93-115, March.
  4. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
  5. Zanjani, George, 2002. "Pricing and capital allocation in catastrophe insurance," Journal of Financial Economics, Elsevier, vol. 65(2), pages 283-305, August.
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Cited by:
  1. Ma, Zong-Gang & Ma, Chao-Qun, 2013. "Pricing catastrophe risk bonds: A mixed approximation method," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 243-254.

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