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Modeling Earthquake Risk via Extreme Value Theory and Pricing the Respective Catastrophe Bonds

Author

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  • Zimbidis, Alexandros A.
  • Frangos, Nickolaos E.
  • Pantelous, Athanasios A.

Abstract

The aim of the paper is twofold. Firstly, to analyze the historical data of the earthquakes in the boarder area of Greece and then to produce a reliable model for the risk dynamics of the magnitude of the earthquakes, using advanced techniques from the Extreme Value Theory. Secondly, to discuss briefly the relevant theory of incomplete markets and price earthquake catastrophe bonds, combining the model found for the earthquake risk and an appropriate model for the interest rate dynamics in an incomplete market framework. The paper ends by providing some numerical results using Monte Carlo simulation techniques and stochastic iterative equations.

Suggested Citation

  • Zimbidis, Alexandros A. & Frangos, Nickolaos E. & Pantelous, Athanasios A., 2007. "Modeling Earthquake Risk via Extreme Value Theory and Pricing the Respective Catastrophe Bonds," ASTIN Bulletin, Cambridge University Press, vol. 37(1), pages 163-183, May.
    • Handle: RePEc:cup:astinb:v:37:y:2007:i:01:p:163-183_01
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    1. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu & Rose Irnawaty Ibrahim, 2024. "Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength," Mathematics, MDPI, vol. 12(6), pages 1-21, March.
    2. Wulan Anggraeni & Sudradjat Supian & Sukono & Nurfadhlina Binti Abdul Halim, 2022. "Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach," Mathematics, MDPI, vol. 10(22), pages 1-22, November.
    3. Shao, Jia & Papaioannou, Apostolos D. & Pantelous, Athanasios A., 2017. "Pricing and simulating catastrophe risk bonds in a Markov-dependent environment," Applied Mathematics and Computation, Elsevier, vol. 309(C), pages 68-84.
    4. Eckhard Platen & David Taylor, 2016. "Loading Pricing of Catastrophe Bonds and Other Long-Dated, Insurance-Type Contracts," Papers 1610.09875, arXiv.org.
    5. Wulan Anggraeni & Sudradjat Supian & Sukono & Nurfadhlina Abdul Halim, 2023. "Single Earthquake Bond Pricing Framework with Double Trigger Parameters Based on Multi Regional Seismic Information," Mathematics, MDPI, vol. 11(3), pages 1-44, January.
    6. Apostolos Kiohos & Maria Paspati, 2021. "Alternative to Insurance Risk Transfer: Creating a catastrophe bond for Romanian earthquakes," Bulletin of Applied Economics, Risk Market Journals, vol. 8(1), pages 1-17.
    7. Wulan Anggraeni & Sudradjat Supian & Sukono & Nurfadhlina Abdul Halim, 2023. "Catastrophe Bond Diversification Strategy Using Probabilistic–Possibilistic Bijective Transformation and Credibility Measures in Fuzzy Environment," Mathematics, MDPI, vol. 11(16), pages 1-30, August.
    8. Georgios Deligiannakis & Alexandros Zimbidis & Ioannis Papanikolaou, 2023. "Earthquake loss and Solvency Capital Requirement calculation using a fault-specific catastrophe model," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 821-846, October.
    9. Rakesh Chandra & Javid Ahmad Dar & Shakil Ahmad Romshoo & Irfan Rashid & Imtiyaz A. Parvez & Sareer Ahmad Mir & Midhat Fayaz, 2018. "Seismic hazard and probability assessment of Kashmir valley, northwest Himalaya, India," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 93(3), pages 1451-1477, September.
    10. Chatoro, Marian & Mitra, Sovan & Pantelous, Athanasios A. & Shao, Jia, 2023. "Catastrophe bond pricing in the primary market: The issuer effect and pricing factors," International Review of Financial Analysis, Elsevier, vol. 85(C).
    11. Ben Ammar, Semir & Braun, Alexander & Eling, Martin, 2015. "Alternative Risk Transfer and Insurance-Linked Securities: Trends, Challenges and New Market Opportunities," I.VW HSG Schriftenreihe, University of St.Gallen, Institute of Insurance Economics (I.VW-HSG), volume 56, number 56.
    12. Stupfler, Gilles & Yang, Fan, 2018. "Analyzing And Predicting Cat Bond Premiums: A Financial Loss Premium Principle And Extreme Value Modeling," ASTIN Bulletin, Cambridge University Press, vol. 48(1), pages 375-411, January.
    13. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu & Rose Irnawaty Ibrahim, 2023. "How to Price Catastrophe Bonds for Sustainable Earthquake Funding? A Systematic Review of the Pricing Framework," Sustainability, MDPI, vol. 15(9), pages 1-19, May.
    14. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu, 2022. "Multiple-Trigger Catastrophe Bond Pricing Model and Its Simulation Using Numerical Methods," Mathematics, MDPI, vol. 10(9), pages 1-17, April.
    15. Sukono & Herlina Napitupulu & Riaman & Riza Andrian Ibrahim & Muhamad Deni Johansyah & Rizki Apriva Hidayana, 2023. "A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces," Mathematics, MDPI, vol. 11(18), pages 1-20, September.
    16. Sukono & Riza Andrian Ibrahim & Moch Panji Agung Saputra & Yuyun Hidayat & Hafizan Juahir & Igif Gimin Prihanto & Nurfadhlina Binti Abdul Halim, 2022. "Modeling Multiple-Event Catastrophe Bond Prices Involving the Trigger Event Correlation, Interest, and Inflation Rates," Mathematics, MDPI, vol. 10(24), pages 1-18, December.

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