Catastrophe option pricing with auto-correlated and catastrophe-dependent intensity

Guanying Wang and Xingchun Wang ()

Physica A: Statistical Mechanics and its Applications, 2019, vol. 526, issue C

Abstract: A discrete-time pricing model is proposed to investigate catastrophe equity put options with auto-correlated and catastrophe-dependent intensity. Catastrophic events are assumed to occur according to a Poisson process and the intensity is affected by the numbers of catastrophic events that occurred in the past. Stochastic volatility of the underlying asset is captured by a GARCH process. We derive a pricing formula for catastrophe equity put options. Numerical simulations show that the ordinary level of catastrophe intensity and the speed of weakening the impact of catastrophe events have an inverted U-shaped relationship with the catastrophe put option prices.

Keywords: Catastrophe equity put options; GARCH processes; Stochastic volatility; Catastrophe-dependent intensity (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437119303899
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:526:y:2019:i:c:s0378437119303899

DOI: 10.1016/j.physa.2019.04.045

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().