Pricing Zero-Coupon Catastrophe Bonds Using EVT with Doubly Stochastic Poisson Arrivals
Joint Authors
Ma, Zonggang
Ma, Chaoqun
Xiao, Shisong
Source
Discrete Dynamics in Nature and Society
Issue
Vol. 2017, Issue 2017 (31 Dec. 2017), pp.1-14, 14 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2017-09-13
Country of Publication
Egypt
No. of Pages
14
Main Subjects
Abstract EN
The frequency and severity of climate abnormal change displays an irregular upward cycle as global warming intensifies.
Therefore, this paper employs a doubly stochastic Poisson process with Black Derman Toy (BDT) intensity to describe the catastrophic characteristics.
By using the Property Claim Services (PCS) loss index data from 2001 to 2010 provided by the US Insurance Services Office (ISO), the empirical result reveals that the BDT arrival rate process is superior to the nonhomogeneous Poisson and lognormal intensity process due to its smaller RMSE, MAE, MRPE, and U and larger E and d.
Secondly, to depict extreme features of catastrophic risks, this paper adopts the Peak Over Threshold (POT) in extreme value theory (EVT) to characterize the tail characteristics of catastrophic loss distribution.
And then the loss distribution is analyzed and assessed using a quantile-quantile (QQ) plot to visually check whether the PCS index observations meet the generalized Pareto distribution (GPD) assumption.
Furthermore, this paper derives a pricing formula for zero-coupon catastrophe bonds with a stochastic interest rate environment and aggregate losses generated by a compound doubly stochastic Poisson process under the forward measure.
Finally, simulation results verify pricing model predictions and show how catastrophic risks and interest rate risk affect the prices of zero-coupon catastrophe bonds.
American Psychological Association (APA)
Ma, Zonggang& Ma, Chaoqun& Xiao, Shisong. 2017. Pricing Zero-Coupon Catastrophe Bonds Using EVT with Doubly Stochastic Poisson Arrivals. Discrete Dynamics in Nature and Society،Vol. 2017, no. 2017, pp.1-14.
https://search.emarefa.net/detail/BIM-1151304
Modern Language Association (MLA)
Ma, Zonggang…[et al.]. Pricing Zero-Coupon Catastrophe Bonds Using EVT with Doubly Stochastic Poisson Arrivals. Discrete Dynamics in Nature and Society No. 2017 (2017), pp.1-14.
https://search.emarefa.net/detail/BIM-1151304
American Medical Association (AMA)
Ma, Zonggang& Ma, Chaoqun& Xiao, Shisong. Pricing Zero-Coupon Catastrophe Bonds Using EVT with Doubly Stochastic Poisson Arrivals. Discrete Dynamics in Nature and Society. 2017. Vol. 2017, no. 2017, pp.1-14.
https://search.emarefa.net/detail/BIM-1151304
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-1151304