EconPapers    
Economics at your fingertips  
 

A General Class of Distortion Operators for Pricing Contingent Claims with Applications to CAT Bonds

Frédéric Godin, Van Son Lai and Denis-Alexandre Trottier

No 2019-004, Working Papers from Department of Research, Ipag Business School

Abstract: The current paper provides a general approach to construct distortion operators that can price financial and insurance risks. Our approach generalizes the Wang (2000) transform and recovers multiple distortions proposed in the literature as particular cases. This approach enables designing distortions that are consistent with various pricing principles used in finance and insurance such as no-arbitrage models, equilibrium models and actuarial premium calculation principles. Such distortions allow for the incorporation of risk-aversion, distribution features (e.g., skewness and kurtosis) and other considerations that are relevant to price contingent claims. The pricing performance of multiple distortions obtained through our approach is assessed on CAT bonds data. The current paper is the first to provide evidence that jump-diffusion models are appropriate for CAT bonds pricing, and that natural disaster aversion impacts empirical prices. A simpler distortion based on a distribution mixture is finally proposed for CAT bonds pricing to facilitate the implementation.

Keywords: Distortion operator; Wang transform; Distortion risk measure; Arbitrage-free pricing; Insurance pricing; Contingent claim pricing; CAT bonds. (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://faculty-research.ipag.edu/wp-content/uploa ... IPAG_WP_2019_004.pdf (application/pdf)

Related works:
Journal Article: A general class of distortion operators for pricing contingent claims with applications to CAT bonds (2019) Downloads
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:ipg:wpaper:2019-004

Access Statistics for this paper

More papers in Working Papers from Department of Research, Ipag Business School Contact information at EDIRC.
Bibliographic data for series maintained by Ingmar Schumacher ().

 
Page updated 2025-03-22
Handle: RePEc:ipg:wpaper:2019-004