Catastrophe risk with global climate change determines the price of catastrophe equity puts

Ming-Che Chuang, Hong-Chih Huang, Shih-Feng Huang and Shih-Kuei Lin

The North American Journal of Economics and Finance, 2025, vol. 80, issue C

Abstract: A growing frequency of natural catastrophes due to global climate change has confronted insurance companies with massive compensation claims and substantial stock price risk. The catastrophe equity put options provide a means to manage such risks. As stock markets usually exhibit volatility clustering, volatility may increase significantly. This article establishes a GARCH model for global climate change to characterize the dynamic process of insurance companies’ stock prices. The incomplete market requires an Esscher transform, a specific risk-neutral probability measure that serves to price the CatEPut. The empirical analysis identifies that the inverse-Gaussian distribution for each catastrophe loss and the random walk with positive drift for the arrival rate of catastrophes perform the best in terms of goodness-of-fit. The sensitivity analysis results illustrate that global climate change, the catastrophe intensity, and the systematic/unsystematic catastrophe risk constitute important factors for determining the CatEPut price.

Keywords: Catastrophe equity put; Global climate change; Catastrophe risk; Systematic risk (search for similar items in EconPapers)
JEL-codes: C15 C51 G13 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001135

DOI: 10.1016/j.najef.2025.102473

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