A Bayesian Monte Carlo Markov Chain Method for Loss Models and Risk Measure Assessments

Ling Hu () and Yating Yang ()
Additional contact information
Ling Hu: Department of Finance, College of Management, National Taiwan University, 1 Roosevelt Road, Sec. 4, Taipei, Taiwan
Yating Yang: Graduate Institute of Finance, College of Management, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2009, vol. 12, issue 03, 529-543

Abstract: Natural disasters are also known as catastrophes with low frequency but high damages. Typhoons and floods are the major catastrophes which lead to gargantuan losses in Asia. Once a disaster occurs, a broad region will be affected and this will result in huge social loss. If issuers or governments use the wrong loss models or risk measure indexes to price the related insurance products, they will get an inaccurate price and thus be insolvent to the claims. Previous researches often use a Log-Normal distribution to model a catastrophic loss. This is not appropriate since the characteristics of a loss distribution have some empirical facts, including the positive skewness and the heavy-tailed properties. Recently, some studies (McNeil and Frey, 2000; Rootzen and Tajvidi, 2000; Thuringet al., 2008) also point out that using Log-Normal distribution to model a characteristic loss is not suitable. Therefore, we build a typhoon and flood loss model with higher order moments and estimate the parameters through a Bayesian Monte Carlo Markov Chain method. According to the Kolmogorov-Smirnov test, we find that the Pareto distribution is more adaptive for modeling the loss of typhoon and flood. Further, we evaluate different kinds of risk measure indexes through simulating and numerical analysis. It gives the beacon to issuers or governments when they want to issue the insurance products about typhoon and flood loss.

Keywords: Typhoon and flood loss distribution; Monte Carlo Markov chain; Kolmogorov-Smirnov test; coherent risk measures (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2009
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091509001733
Access to full text is restricted to subscribers

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:wsi:rpbfmp:v:12:y:2009:i:03:n:s0219091509001733

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091509001733

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().