Pricing of Catastrophe Risk and the Implied Volatility Smile

Item Type Monograph (Working Paper)
Abstract

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).

Authors Ben Ammar, Semir
Language English
Keywords Implied volatility, Options, Catastrophe risk, Tail risk, Natural disasters
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area None
Date 22 July 2016
Publisher SoF - HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Volume 2016/17
Number 17
Number of Pages 51
Depositing User Geraldine Frei-Böbel
Date Deposited 22 Aug 2016 12:06
Last Modified 23 Aug 2016 11:24
URI: https://www.alexandria.unisg.ch/publications/249096

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Citation

Ben Ammar, Semir: Pricing of Catastrophe Risk and the Implied Volatility Smile. School of Finance Working Paper Series, 2016, 17.

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https://www.alexandria.unisg.ch/id/eprint/249096
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