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A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces

Author

Listed:
  • Sukono

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Herlina Napitupulu

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Riaman

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Riza Andrian Ibrahim

    (Doctoral Program of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Muhamad Deni Johansyah

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Rizki Apriva Hidayana

    (Magister Program of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

Abstract

The national scale of catastrophic losses risk linked to state catastrophe bonds (SCB) is enormous. It can reduce investors’ interest in buying them because the capital required and the loss probability are also significant. To overcome this, the SCB can be made on a smaller regional scale, known as a regional catastrophe bond (RCB). Through RCBs, the catastrophic loss risk investors bear becomes smaller, which can increase investors’ interest in buying them. Unfortunately, RCB issuance faced a fundamental obstacle, where its complex pricing model needed further study. Therefore, this study aims to model it. The model uniquely involves the inflation rate modeled using the Fisher equation and the nonbinary scheme of coupon and redemption value payments modeled by a compound Poisson process. In addition, the model is applied to Indonesia’s catastrophe data, resulting in all provinces’ RCB price estimation and the effects of several variables on RCB price. This research can guide the RCB pricing process of the country’s regions. The estimated RCB prices can be used by Indonesia’s government if RCBs are to be issued one day. Finally, the effects of the inflation rate, catastrophe intensity, and geographical location on RCB prices can guide investors in selecting bond portfolios.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:18:p:3825-:d:1234206
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    Cited by:

    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.

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