Pricing catastrophe risk bonds: A mixed approximation method

Zong-Gang Ma and Chao-Qun Ma

Insurance: Mathematics and Economics, 2013, vol. 52, issue 2, 243-254

Abstract: This paper presents a contingent claim model similar to the one described by Lee and Yu (2002) for pricing catastrophe risk bonds. First, we derive a bond pricing formula in a stochastic interest rates environment with the losses following a compound nonhomogeneous Poisson process. Furthermore, we estimate and calibrate the parameters of the pricing model using the catastrophe loss data provided by Property Claim Services (PCS) from 1985 to 2010. As no closed-form solution can be obtained, we propose a mixed approximation method to find the numerical solution for the price of catastrophe risk bonds. Finally, numerical experiments demonstrate how financial risks and catastrophic risks affect the prices of catastrophe bonds.

Keywords: Catastrophe risk bonds; Stochastic interest rates; Compound nonhomogeneous Poisson process; PCS loss; Mixed approximation method (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:52:y:2013:i:2:p:243-254

DOI: 10.1016/j.insmatheco.2012.12.007

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