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Data Breach CAT Bonds: Modeling and Pricing

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  • Maochao Xu
  • Yiying Zhang

Abstract

Data breaches cause millions of dollars in financial losses each year. The insurance industry has been exploring the ways to transfer such extreme risk. In this work, we investigate data breach catastrophe (CAT) bonds via developing a multiperiod pricing model. It is found that the nonstationary extreme value model can capture the statistical pattern of the monthly maximum of data breach size very well and, in particular, a positive time trend is discovered. For the financial risks, data-driven time series approaches are proposed to model the complex patterns exhibited by the financial data, which are different from those in the literature. Simulation studies are performed to determine the bond prices and cash flows. Our results show that the data breach CAT bond can be an attractive financial product and an effective instrument for transferring the extreme data breach risk.

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  • Maochao Xu & Yiying Zhang, 2021. "Data Breach CAT Bonds: Modeling and Pricing," North American Actuarial Journal, Taylor & Francis Journals, vol. 25(4), pages 543-561, November.
    • Handle: RePEc:taf:uaajxx:v:25:y:2021:i:4:p:543-561
    DOI: 10.1080/10920277.2021.1886948
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    Cited by:

    1. Wulan Anggraeni & Sudradjat Supian & Sukono & Nurfadhlina Binti Abdul Halim, 2022. "Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach," Mathematics, MDPI, vol. 10(22), pages 1-22, November.

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