Modeling Multiple-Event Catastrophe Bond Prices Involving the Trigger Event Correlation, Interest, and Inflation Rates

Sukono (), Riza Andrian Ibrahim, Moch Panji Agung Saputra, Yuyun Hidayat, Hafizan Juahir, Igif Gimin Prihanto and Nurfadhlina Binti Abdul Halim
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Sukono: Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Jatinangor 45363, Indonesia
Riza Andrian Ibrahim: Doctoral Program of Mathematics, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Jatinangor 45363, Indonesia
Moch Panji Agung Saputra: Doctoral Program of Mathematics, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Jatinangor 45363, Indonesia
Yuyun Hidayat: Department of Statistics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Jatinangor 45363, Indonesia
Hafizan Juahir: East Coast Environmental Research Institute (ESERI), Universiti Sultan Zainal Abidin, Kuala Terengganu 21300, Malaysia
Igif Gimin Prihanto: Research Center for Testing Technology and Standards, National Research and Innovation Agency, Central Jakarta 10340, Indonesia
Nurfadhlina Binti Abdul Halim: Faculty of Science and Technology, Universiti Sains Islam Malaysia, Bandar Baru Nilai 71800, Malaysia

Mathematics, 2022, vol. 10, issue 24, 1-18

Abstract: The issuance of multiple-event catastrophe bonds (MECBs) has the potential to increase in the next few years. This is due to the increasing trend in the frequency of global catastrophes, which makes single-event catastrophe bonds (SECBs) less relevant. However, there are obstacles to issuing MECBs since the pricing framework is still little studied. Therefore, this study aims to develop such a new pricing framework. The model uniquely involves three new variables: the trigger event correlation, interest, and inflation rates. The trigger event correlation rate was accommodated by the involvement of the copula while the interest and inflation rates were simultaneously considered using an integrated autoregressive vector stochastic model. After the model was obtained, the model was simulated on storm catastrophe data in the United States. Finally, the effect of the three variables on MECB prices was also analyzed. The analysis results show that the three variables make MECB prices more fairly than other models. This research is expected to guide special purpose vehicles to set fairer MECB prices and can also be used as a reference for investors in choosing MECBs based on the rates of trigger event correlation and the real interest they can expect.

Keywords: multiple-event catastrophe bond; trigger event correlation rate; interest rate; inflation rate; copula; integrated autoregressive vector (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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