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Pricing catastrophe risk bonds: A mixed approximation method

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  • Ma, Zong-Gang
  • Ma, Chao-Qun

Abstract

This paper presents a contingent claim model similar to the one described by Lee and Yu (2002) for pricing catastrophe risk bonds. First, we derive a bond pricing formula in a stochastic interest rates environment with the losses following a compound nonhomogeneous Poisson process. Furthermore, we estimate and calibrate the parameters of the pricing model using the catastrophe loss data provided by Property Claim Services (PCS) from 1985 to 2010. As no closed-form solution can be obtained, we propose a mixed approximation method to find the numerical solution for the price of catastrophe risk bonds. Finally, numerical experiments demonstrate how financial risks and catastrophic risks affect the prices of catastrophe bonds.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:insuma:v:52:y:2013:i:2:p:243-254
    DOI: 10.1016/j.insmatheco.2012.12.007
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:apmaco:v:309:y:2017:i:c:p:68-84 is not listed on IDEAS
    2. Eckhard Platen & David Taylor, 2016. "Loading Pricing of Catastrophe Bonds and Other Long-Dated, Insurance-Type Contracts," Papers 1610.09875, arXiv.org.
    3. repec:eee:insuma:v:88:y:2019:i:c:p:238-254 is not listed on IDEAS
    4. Burnecki, Krzysztof & Giuricich, Mario Nicoló & Palmowski, Zbigniew, 2019. "Valuation of contingent convertible catastrophe bonds — The case for equity conversion," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 238-254.
    5. repec:pdc:jrnbeh:v:14:y:2018:i:2:p:256-267 is not listed on IDEAS

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