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Model-independent price bounds for Catastrophic Mortality Bonds

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  • Bahl, Raj Kumari
  • Sabanis, Sotirios

Abstract

In this paper, we are concerned with the valuation of Catastrophic Mortality Bonds and, in particular, we examine the case of the Swiss Re Mortality Bond 2003 as a primary example of this class of assets. This bond was the first Catastrophic Mortality Bond to be launched in the market and encapsulates the behaviour of a well-defined mortality index to generate payoffs for bondholders. Pricing these type of bonds is a challenging task and no closed form solution exists in the literature. In our approach, we express the payoff of such a bond in terms of the payoff of an Asian put option and present a new approach to derive model-independent bounds exploiting comonotonic theory as illustrated in Albrecher (2008), Dhaene (2002) and Simon (2000) for the pricing of Asian options. We carry out Monte Carlo simulations to estimate the bond price and illustrate the quality of the bounds.

Suggested Citation

  • Bahl, Raj Kumari & Sabanis, Sotirios, 2021. "Model-independent price bounds for Catastrophic Mortality Bonds," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 276-291.
    • Handle: RePEc:eee:insuma:v:96:y:2021:i:c:p:276-291
    DOI: 10.1016/j.insmatheco.2020.12.001
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    3. Hanbali, Hamza & Dhaene, Jan & Linders, Daniël, 2022. "Dependence bounds for the difference of stop-loss payoffs on the difference of two random variables," Insurance: Mathematics and Economics, Elsevier, vol. 107(C), pages 22-37.

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    More about this item

    Keywords

    Mortality Risk; Catastrophic Mortality Bonds; Model-independent bounds; Asian options; Comonotonicity;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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