Market-Consistent Valuation of Natural Catastrophe Risk
Journal
Journal of Banking and Finance
ISSN
0378-4266
Type
journal article
Date Issued
2022-01
Author(s)
Abstract (De)
Natural catastrophe risk is increasingly being covered through alternative capital instead of reinsurance. Since most such instruments do not trade in an active market, their ongoing valuation is a challenge. As a solution, we propose to exploit pricing information embedded in secondary market catastrophe bond quotes. Specifically, we use a reduced form model to extract implied Poisson intensities from regularly observed prices. Next, we show that the intensities can be explained by time to maturity and modeled probability of first loss. Along these two dimensions, we estimate smooth intensity surfaces that allow investors to mark illiquid catastrophe risk positions to market.
Language
English
Keywords
Natural Catastrophe Risk
Asset Pricing
Reduced Form Model
Random Effects Model
Implied Intensity Surfaces
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Volume
134
Division(s)
Eprints ID
262323