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An Equilibrium Model of Catastrophe Insurance Futures and Spreads

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  • Knut Aase

    (Norwegian School of Economics and Business Administration, Helleveien 30, N-5035 Bergen-Sandviken, and the University of Oslo, Norway)

Abstract

This article presents a valuation model of futures contracts and derivatives on such contracts, when the underlying delivery value is an insurance index, which follows a stochastic process containing jumps of random claim sizes at random time points of accident occurrence. Applications are made on insurance futures and spreads, a relatively new class of instruments for risk management launched by the Chicago Board of Trade in 1993, anticipated to start in Europe and perhaps also in other parts of the world in the future. The article treats the problem of pricing catastrophe risk, which is priced in the model and not treated as unsystematic risk. Several closed pricing formulas are derived, both for futures contracts and for futures derivatives, such as caps, call options, and spreads. The framework is that of partial equilibrium theory under uncertainty. The Geneva Papers on Risk and Insurance Theory (1999) 24, 69–96. doi:10.1023/A:1008785300001

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 24 (1999)
Issue (Month): 1 (June)
Pages: 69-96

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Handle: RePEc:pal:genrir:v:24:y:1999:i:1:p:69-96

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Cited by:
  1. Chang, Carolyn W. & Chang, Jack S.K. & Lu, WeiLi, 2008. "Pricing catastrophe options in discrete operational time," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 422-430, December.
  2. 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.
  3. Aase, Knut K., 2005. "Using Option Pricing Theory to Infer About Equity Premiums," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2005/11, Department of Business and Management Science, Norwegian School of Economics.
  4. Chang, Carolyn W. & Chang, Jack S.K. & Lu, WeLi, 2010. "Pricing catastrophe options with stochastic claim arrival intensity in claim time," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(1), pages 24-32, January.
  5. Paul Embrechts, 1996. "Actuarial versus Financial Pricing of Insurance," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Blanchet-Scalliet, Christophette & El Karoui, Nicole & Martellini, Lionel, 2005. "Dynamic asset pricing theory with uncertain time-horizon," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(10), pages 1737-1764, October.
  7. Aase, Knut K., 2004. "The perpetual American put option for jump-diffusions: Implications for equity premiums," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2004/19, Department of Business and Management Science, Norwegian School of Economics.
  8. de Lange, Petter E. & Fleten, Stein-Erik & Gaivoronski, Alexei A., 2004. "Modeling financial reinsurance in the casualty insurance business via stochastic programming," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(5), pages 991-1012, February.
  9. Aase, Knut K, 2005. "Using Option Pricing Theory to Infer About Historical Equity Premiums," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt3dd602j5, Anderson Graduate School of Management, UCLA.
  10. Aase, Knut K, 2005. "The perpetual American put option for jump-diffusions with applications," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt31g898nz, Anderson Graduate School of Management, UCLA.

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