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Catastrophe equity put options with target variance

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  • Wang, Xingchun

Abstract

In this study, we consider a new class of catastrophe equity put options, whose payoff depends on the ratio of the realized variance of the stock over the life of the option and the target variance, which represents the insurance company’s expectation of the future realized variance. This kind of options could help insurance companies raise more equity capital when a large number of catastrophic events occur during the life of the option. We employ a compound doubly stochastic Poisson process with lognormal intensity to describe accumulated catastrophe losses and assume the volatility varies stochastically. Finally, numerical results are presented to investigate the values of this class of options.

Suggested Citation

  • Wang, Xingchun, 2016. "Catastrophe equity put options with target variance," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 79-86.
  • Handle: RePEc:eee:insuma:v:71:y:2016:i:c:p:79-86
    DOI: 10.1016/j.insmatheco.2016.08.010
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:phsmap:v:485:y:2017:i:c:p:91-103 is not listed on IDEAS
    2. Krzysztof Burnecki & Mario Nicol'o Giuricich & Zbigniew Palmowski, 2018. "Valuation of contingent convertible catastrophe bonds - the case for equity conversion," Papers 1804.07997, arXiv.org.

    More about this item

    Keywords

    Catastrophe equity put options; Realized variance; Realized volatility; Catastrophic events; Doubly stochastic Poisson processes;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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