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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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    Cited by:

    1. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
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    3. Massimo Arnone & Michele Leonardo Bianchi & Anna Grazia Quaranta & Gian Luca Tassinari, 2021. "Catastrophic risks and the pricing of catastrophe equity put options," Computational Management Science, Springer, vol. 18(2), pages 213-237, June.
    4. Bi, Hongwei & Wang, Guanying & Wang, Xingchun, 2019. "Valuation of catastrophe equity put options with correlated default risk and jump risk," Finance Research Letters, Elsevier, vol. 29(C), pages 323-329.
    5. Wang, Guanying & Wang, Xingchun & Zhou, Ke, 2017. "Pricing vulnerable options with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 485(C), pages 91-103.
    6. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    7. Wang, Xingchun, 2020. "Catastrophe equity put options with floating strike prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    8. Wang, Xingchun, 2019. "Valuation of new-designed contracts for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Catastrophe equity put options; Realized variance; Realized volatility; Catastrophic events; Doubly stochastic Poisson processes;
    All these keywords.

    JEL classification:

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

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