Extremal Analysis of Flooding Risk and Its Catastrophe Bond Pricing

Jiayi Li, Zhiyan Cai, Yixuan Liu and Chengxiu Ling ()
Additional contact information
Jiayi Li: Department of Science Statistics with Data Science, The University of Edinburgh, Edinburgh EH15 1LR, UK
Zhiyan Cai: Institute of Health Informatics, University College London, London WC1H 9BT, UK
Yixuan Liu: Department of Financial and Actuarial Mathematics, Xi’an Jiaotong-Liverpool University, Suzhou 215123, China
Chengxiu Ling: Academy of Pharmacy, Xi’an Jiaotong-Liverpool University, Suzhou 215123, China

Mathematics, 2022, vol. 11, issue 1, 1-14

Abstract: Catastrophic losses induced by natural disasters are receiving growing attention because of the severe increases in their magnitude and frequency. We first investigated the extreme tail behavior of flood-caused economic losses and maximum point precipitation based on the peaks-over-threshold method and point process (PP) model and its extreme tail dependence. We found that both maximum point precipitation and direct economic losses are well-modeled by the PP approach with certain tail dependence. These findings were further utilized to design a layered compensation insurance scheme using estimated value-at-risk (VaR) and conditional VaR (CVaR) among all stakeholders. To diversify the higher level of losses due to extreme precipitation, we designed a coupon paying catastrophe bond triggered by hierarchical maximum point precipitation level, based on the mild assumption on the independence between flood-caused risk and financial risk. The pricing sensitivity was quantitatively analyzed in terms of the tail risk of the flood disaster and the distortion magnitude and the market risk in Wang’s transform. Our trigger process was carefully designed using a compound Poisson process, modeling both the frequency and the layered intensity of flood disasters. Lastly, regulations and practical suggestions are provided regarding the flood risk prevention and warning.

Keywords: extreme value theory; peaks-over-threshold; CAT bond; point process; Vasicek model; tail dependence; distortion measure; floods (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 (2)

Downloads: (external link)
https://www.mdpi.com/2227-7390/11/1/114/pdf (application/pdf)
https://www.mdpi.com/2227-7390/11/1/114/ (text/html)

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:gam:jmathe:v:11:y:2022:i:1:p:114-:d:1016181

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().