Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

Hwa-Sung Kim, Bara Kim and Jerim Kim

Economic Modelling, 2014, vol. 41, issue C, 15-22

Abstract: A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.

Keywords: Catastrophe equity put option; Bivariate exponential distribution; Option pricing (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:41:y:2014:i:c:p:15-22

DOI: 10.1016/j.econmod.2014.04.007

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