Pricing Catastrophe Insurance Derivatives
We investigate the valuation of catastrophe insurance derivatives that are traded at the Chicago Board of Trade. By modelling the underlying index as a compound Poisson process we give a representation of no-arbitrage price processes using Fourier analysis. This characterization enables us to derive the inverse Fourier transform of prices in closed form for every fixed equivalent martingale measure. It is shown that the set of equivalent measures, the set of no-arbitrage prices, and the market prices of frequency and jump size risk are in one-to-one connection. Following a representative agent approach we determine the unique equivalent martingale under which prices in the insurance market are calculated.
References listed on IDEAS
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- Robert C. Merton, 2005.
"Theory of rational option pricing,"
World Scientific Book Chapters,
in: Theory Of Valuation, chapter 8, pages 229-288
World Scientific Publishing Co. Pte. Ltd..
- Delbaen, F. & Haezendonck, J., 1989. "A martingale approach to premium calculation principles in an arbitrage free market," Insurance: Mathematics and Economics, Elsevier, vol. 8(4), pages 269-277, December.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
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