Basis risk management and randomly scaled uncertainty (Q2682982): Difference between revisions

The paper provides a method for quantifying the basis risk present in index-based insurance. Some relevant issues concerning randomly scaled variables are previously discussed. Then, the stochastic ordering in the s-convex sense of these variables is analyzed, achieving the associated extreme distributions which provides a worst-case scenario. The impact of basis risk is measured in the case of a flexible class of penalty functions; further, the basis risk limit is obtained, when a fixed budget is available. Some numerical results exemplify the methodology proposed throughout the paper. Finally, additional results are in the Appendix.