Valuation of contingent convertible catastrophe bonds -- the case for equity conversion
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Publication:2273992
DOI10.1016/J.INSMATHECO.2019.07.006zbMATH Open1425.91215arXiv1804.07997OpenAlexW2969181752MaRDI QIDQ2273992FDOQ2273992
Authors: Krzysztof Burnecki, Mario Nicoló Giuricich, Zbigniew Palmowski 
Publication date: 19 September 2019
Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)
Abstract: Within the context of the banking-related literature on contingent convertible bonds, we comprehensively formalise the design and features of a relatively new type of insurance-linked security, called a contingent convertible catastrophe bond (CocoCat). We begin with a discussion of its design and compare its relative merits to catastrophe bonds and catastrophe-equity puts. Subsequently, we derive analytical valuation formulae for index-linked CocoCats under the assumption of independence between natural catastrophe and financial markets risks. We model natural catastrophe losses by a time-inhomogeneous compound Poisson process, with the interest-rate process governed by the Longstaff model. By using an exponential change of measure on the loss process, as well as a Girsanov-like transformation to synthetically remove the correlation between the share and interest-rate processes, we obtain these analytical formulae. Using selected parameter values in line with earlier research, we empirically analyse our valuation formulae for index-linked CocoCats. An analysis of the results reveals that the CocoCat prices are most sensitive to changing interest-rates, conversion fractions and the threshold levels defining the trigger times.
Full work available at URL: https://arxiv.org/abs/1804.07997
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risk neutral measurecatastrophe riskheavy-tailed datacontingent convertible bondlongstaff modeltime-inhomogeneous compound Poisson process
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Cited In (7)
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- Poisson-Gamma mixture processes and applications to premium calculation
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- Equilibrium in natural catastrophe insurance market under disaster-resistant technologies, financial innovations and government interventions
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- Estimating the Value of the Wincat Coupons of the Winterthur Insurance Convertible Bond: A Study of the Model Risk
- On some generalized American style derivatives
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