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Modelling and pricing of catastrophe risk bonds with a temperature-based agricultural application

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  • N. Karagiannis
  • H. Assa
  • A. A. Pantelous
  • C. G. Turvey

Abstract

Catastrophe risk bonds are always within a multi-asset class portfolio of alternative risk premia in many hedge funds. In this paper, we consider an over-the-counter insurance contract on catastrophe risk between an insurance company and a hedge-fund. The contract acts as a bond within which the insurance company, which issues the bond, pays payments higher than the market risk-free interest, in order to be insured against the risk of a predefined natural catastrophe. The contract is priced by the utility indifference pricing method. We apply our framework to price agricultural catastrophe bonds in two cities in Iran where their harvests are exposed to the risk of low temperature.

Suggested Citation

  • N. Karagiannis & H. Assa & A. A. Pantelous & C. G. Turvey, 2016. "Modelling and pricing of catastrophe risk bonds with a temperature-based agricultural application," Quantitative Finance, Taylor & Francis Journals, vol. 16(12), pages 1949-1959, December.
    • Handle: RePEc:taf:quantf:v:16:y:2016:i:12:p:1949-1959
    DOI: 10.1080/14697688.2016.1211791
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    References listed on IDEAS

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    1. J. David Cummins & Olivier Mahul, 2009. "Catastrophe Risk Financing in Developing Countries : Principles for Public Intervention," World Bank Publications - Books, The World Bank Group, number 6289, December.
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    1. Wulan Anggraeni & Sudradjat Supian & Sukono & Nurfadhlina Binti Abdul Halim, 2022. "Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach," Mathematics, MDPI, vol. 10(22), pages 1-22, November.
    2. Assa, Hirbod & Sharifi, Hossein & Lyons, Andrew, 2021. "An examination of the role of price insurance products in stimulating investment in agriculture supply chains for sustained productivity," European Journal of Operational Research, Elsevier, vol. 288(3), pages 918-934.
    3. Shao, Jia & Papaioannou, Apostolos D. & Pantelous, Athanasios A., 2017. "Pricing and simulating catastrophe risk bonds in a Markov-dependent environment," Applied Mathematics and Computation, Elsevier, vol. 309(C), pages 68-84.
    4. Chatoro, Marian & Mitra, Sovan & Pantelous, Athanasios A. & Shao, Jia, 2023. "Catastrophe bond pricing in the primary market: The issuer effect and pricing factors," International Review of Financial Analysis, Elsevier, vol. 85(C).
    5. Sukono & Herlina Napitupulu & Riaman & Riza Andrian Ibrahim & Muhamad Deni Johansyah & Rizki Apriva Hidayana, 2023. "A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces," Mathematics, MDPI, vol. 11(18), pages 1-20, September.
    6. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu, 2022. "Multiple-Trigger Catastrophe Bond Pricing Model and Its Simulation Using Numerical Methods," Mathematics, MDPI, vol. 10(9), pages 1-17, April.

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