Pricing of Catastrophe Risk and the Implied Volatility Smile
Semir Ben Ammar ()
No 1617, Working Papers on Finance from University of St. Gallen, School of Finance
Property-casualty (P&C) insurers are exposed to rare but severe natural disasters. This paper analyzes the relation between catastrophe risk and the implied volatility smile of insurance stock options. We find that the slope is significantly steeper compared to non-financials and other financial institutions. We show that this effect has increased over time, suggesting a higher risk compensation for catastrophic events. We are able to link the insurance-specific tail risk component derived from options with the risk spread from catastrophe bonds. Our results provide an accurate, high-frequency calculation for catastrophe risk linking the traditional derivatives market with insurance-linked securities (ILS).
Keywords: Implied volatility; Options; Catastrophe risk; Tail risk; Natural disasters (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G22 (search for similar items in EconPapers)
Pages: 51 pages
New Economics Papers: this item is included in nep-fmk, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2016:17
Access Statistics for this paper
More papers in Working Papers on Finance from University of St. Gallen, School of Finance Contact information at EDIRC.
Bibliographic data for series maintained by Geraldine Frei ().