On s-convex bounds for Beta-unimodal distributions with applications to basis risk assessment

Claude Lefèvre, Stéphane Loisel and Pierre Montesinos

Scandinavian Actuarial Journal, 2021, vol. 2021, issue 6, 476-504

Abstract: This paper is concerned with properties of Beta-unimodal distributions and their use to assess the basis risk inherent to index-based insurance or reinsurance contracts. To this extent, we first characterize s-convex stochastic orders for Beta-unimodal distributions in terms of the Weyl fractional integral. We then determine s-convex extrema for such distributions, focusing in particular on the cases s = 2, 3, 4. Next, we define an Enterprise Risk Management framework that relies on Beta-unimodality to assess these hedge imperfections, introducing several penalty functions and worst case scenarios. Some of the results obtained are illustrated numerically via a representative catastrophe model.

Date: 2021
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DOI: 10.1080/03461238.2020.1852596

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