Post by Sapphire Capital on Oct 30, 2008 22:59:15 GMT 4
Pricing Catastrophe Insurance Derivatives with Stochastic Interest Rates and Regime-Switching Jump Diffusion Losses
Szu-Lang Liao
Department of Money and Banking, National Chengchi University
So-De Shyu
National Sun Yat-Sen University
The Icfai University Journal of Risk & Insurance, Vol. 5, No. 4, pp. 7-28, October 2008
Abstract:
This article introduces a regime-switching jump diffusion model to capture the arrival and loss process for the catastrophic loss index. Based on this model, we price catastrophe insurance derivatives - the Property Claim Services (PCS) futures call option, the PCS futures call spread and the default-free catastrophe bond. Under a framework of incomplete markets, and using non-traded CAT (catastrophe) loss indices, the existence of a well-defined, arbitrage-free price is shown, and the analytic closed-form pricing formulas can be implemented via the fast Fourier transform. We derive the hedging parameters, Delta, Gamma and Rho, from these formulas. Further, the sensitivity analysis of the parameters are conducted to study the effect of these contingent claims valuation.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1285387
Szu-Lang Liao
Department of Money and Banking, National Chengchi University
So-De Shyu
National Sun Yat-Sen University
The Icfai University Journal of Risk & Insurance, Vol. 5, No. 4, pp. 7-28, October 2008
Abstract:
This article introduces a regime-switching jump diffusion model to capture the arrival and loss process for the catastrophic loss index. Based on this model, we price catastrophe insurance derivatives - the Property Claim Services (PCS) futures call option, the PCS futures call spread and the default-free catastrophe bond. Under a framework of incomplete markets, and using non-traded CAT (catastrophe) loss indices, the existence of a well-defined, arbitrage-free price is shown, and the analytic closed-form pricing formulas can be implemented via the fast Fourier transform. We derive the hedging parameters, Delta, Gamma and Rho, from these formulas. Further, the sensitivity analysis of the parameters are conducted to study the effect of these contingent claims valuation.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1285387