Model-Independent Price Bounds for Catastrophic Mortality Bonds

Raj Kumari Bahl and Sotirios Sabanis

Papers from arXiv.org

Abstract: In this paper, we are concerned with the valuation of Catastrophic Mortality Bonds and, in particular, we examine the case of the Swiss Re Mortality Bond 2003 as a primary example of this class of assets. This bond was the first Catastrophic Mortality Bond to be launched in the market and encapsulates the behaviour of a well-defined mortality index to generate payoffs for bondholders. Pricing these type of bonds is a challenging task and no closed form solution exists in the literature. In our approach, we express the payoff of such a bond in terms of the payoff of an Asian put option and present a new approach to derive model-independent bounds exploiting comonotonic theory as illustrated in \cite{prime1}, \cite{2} and \cite{Simon} for the pricing of Asian options. We carry out Monte Carlo simulations to estimate the bond price and illustrate the quality of the bounds.

Date: 2016-07, Revised 2020-12
New Economics Papers: this item is included in nep-cmp and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1607.07108

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