Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach

Wulan Anggraeni (), Sudradjat Supian, Sukono and Nurfadhlina Binti Abdul Halim
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Wulan Anggraeni: Doctoral Program of Mathematics, Faculty of Mathematics and Natural Science, Universitas Padjadjaran, Sumedang 45363, Indonesia
Sudradjat Supian: Departemen of Mathematics, Faculty of Mathematics and Natural Science, Universitas Padjadjaran, Sumedang 45363, Indonesia
Sukono: Departemen of Mathematics, Faculty of Mathematics and Natural Science, Universitas Padjadjaran, Sumedang 45363, Indonesia
Nurfadhlina Binti Abdul Halim: Faculty of Science and Technology, University Sains Islam Malaysia, Bandar Baru Nilai, Nilai 71800, Negeri Sembilan, Malaysia

Mathematics, 2022, vol. 10, issue 22, 1-22

Abstract: Earthquake catastrophe bond pricing models (ECBPMs) employ extreme value theory (EVT) to predict severe losses, although studies on EVT’s use in ECBPMs are still rare. Therefore, this study aimed to use a mini-review approach (MRA) to examine the use of EVT and identify the gaps and weaknesses in the methods or models developed. The MRA stages include planning, search and selection, analysis, and interpretation of the results. The selection results showed five articles regarding the application of EVT in ECBPMs. Furthermore, the analysis found the following: First, the generalized extreme value (GEV) could eliminate extreme data in a period. Second, the trigger model using two parameters is better than one, but the study did not discuss the joint distribution of the two parameters. Third, the autoregressive integrated moving average (ARIMA) allows negative values. Fourth, Cox–Ingersoll–Ross (CIR) in-coupon modeling is less effective in depicting the real picture. This is because it has a constant volatility assumption and cannot describe jumps due to monetary policy. Based on these limitations, it is hoped that future studies can develop an ECBPM that reduces the moral hazard.

Keywords: earthquake disaster; bond pricing model; extreme value theory (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 (7)

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