Pricing catastrophe bonds with multistage stochastic programming

Nick Georgiopoulos ()
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Nick Georgiopoulos: Bermuda Monetary Authority (BMA)

Computational Management Science, 2017, vol. 14, issue 3, No 1, 297-312

Abstract: Abstract In this paper we present a method of pricing catastrophe bonds (cat bonds) using stochastic programming. Stochastic programming is a method ubiquitous in operations research when decision problems involve uncertainty. We demonstrate the method for pricing cat bonds which bypasses the need to define the equivalent martingale measure or estimate the market price of risk. The price of the cat bond is simply the coupon that needs to be paid that attains a specified return on investment given a set of constraints that define the payoffs.

Keywords: Catastrophe bonds; Reinsurance; Stochastic programming; Insurance linked securities (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10287-017-0277-6

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