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


  • Wolfgang Karl Härdle
  • Brenda López Cabrera


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.

Suggested Citation

  • Wolfgang Karl Härdle & Brenda López Cabrera, 2008. "Calibration of Parametric CAT bonds. A case study of Mexican earthquakes," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 128(4), pages 615-630.
  • Handle: RePEc:aeq:aeqsjb:v128_y2008_i4_q4_p615-630

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    References listed on IDEAS

    1. Lee, Sokbae & Wilke, Ralf A., 2009. "Reform of Unemployment Compensation in Germany: A Nonparametric Bounds Analysis Using Register Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(2), pages 193-205.
    2. Waller, Marie, 2007. "Do reported end dates of treatments matter for evaluation results? : an investigation based on the German integrated employment biographies sample," FDZ Methodenreport 200701_en, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    3. Bernd Fitzenberger & Ralf A. Wilke, 2010. "Unemployment Durations in West Germany Before and After the Reform of the Unemployment Compensation System during the 1980s," German Economic Review, Verein für Socialpolitik, vol. 11, pages 336-366, August.
    4. Hummel, Elisabeth & Jacobebbinghaus, Peter & Kohlmann, Annette & Oertel, Martina & Wübbeke, Christina & Ziegerer, Manfred, 2005. "Stichprobe der Integrierten Erwerbsbiografien : IEBS 1.0, Handbuch-Version 1.0.0 (Integrated Employment Biographies Sample IEBS 1.0)," FDZ Datenreport. Documentation on Labour Market Data 200506_de, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
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    More about this item

    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 and their Management; Global Warming


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