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2007-06-22Diskussionspapier DOI: 10.18452/4056
Calibrating CAT Bonds for Mexican Earthquakes
dc.contributor.authorHärdle, Wolfgang Karl
dc.contributor.authorCabrera, Brenda López
dc.date.accessioned2017-06-15T23:28:10Z
dc.date.available2017-06-15T23:28:10Z
dc.date.created2007-07-19
dc.date.issued2007-06-22
dc.identifier.issn1860-5664
dc.identifier.urihttp://edoc.hu-berlin.de/18452/4708
dc.description.abstractThe study of natural catastrophe models plays an important role in the prevention and mitigation of disasters. After the occurrence of a natural disaster, the reconstruction can be financed with catastrophe bonds (CAT bonds) or reinsurance. This paper examines the calibration of a real parametric CAT bond for earthquakes that was sponsored by the Mexican government. The calibration of the CAT bond is based on the estimation of the intensity rate that describes the earthquake process from the two sides of the contract, the reinsurance and the capital markets, and from the historical data. The results demonstrate that, under specific conditions, the financial strategy of the government, a mix of reinsurance and CAT bond, is optimal in the sense that it provides coverage of USD 450 million for a lower cost than the reinsurance itself. Since other variables can affect the value of the losses caused by earthquakes, e.g. magnitude, depth, city impact, etc., we also derive the price of a hypothetical modeled-index (zero) coupon CAT bond for earthquakes, which is based on a compound doubly stochastic Poisson pricing methodology. In essence, this hybrid trigger combines modeled loss and index trigger types, trying to reduce basis risk borne by the sponsor while still preserving a non-indemnity trigger mechanism. Our results indicate that the (zero) coupon CAT bond price increases as the threshold level increases, but decreases as the expiration time increases. Due to the quality of the data, the results show that the expected loss is considerably more important for the valuation of the CAT bond than the entire distribution of losses.eng
dc.language.isoeng
dc.publisherHumboldt-Universität zu Berlin, Wirtschaftswissenschaftliche Fakultät
dc.rights.urihttp://rightsstatements.org/vocab/InC/1.0/
dc.subjectEarthquakeseng
dc.subjectCAT bondseng
dc.subjectReinsuranceeng
dc.subjectTrigger mechanismeng
dc.subjectDoubly Stochastic Poisson Processeng
dc.subject.ddc330 Wirtschaft
dc.titleCalibrating CAT Bonds for Mexican Earthquakes
dc.typeworkingPaper
dc.identifier.urnurn:nbn:de:kobv:11-10078499
dc.identifier.doihttp://dx.doi.org/10.18452/4056
local.edoc.pages35
local.edoc.type-nameDiskussionspapier
local.edoc.container-typeseries
local.edoc.container-type-nameSchriftenreihe
local.edoc.container-year2007
dc.identifier.zdb2195055-6
bua.series.nameSonderforschungsbereich 649: Ökonomisches Risiko
bua.series.issuenumber2007,37

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