IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v11y2023i3p689-d1050516.html
   My bibliography  Save this article

Single Earthquake Bond Pricing Framework with Double Trigger Parameters Based on Multi Regional Seismic Information

Author

Listed:
  • Wulan Anggraeni

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

  • Sudradjat Supian

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

  • Sukono

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

  • Nurfadhlina Abdul Halim

    (Faculty of Science and Technology, Universiti Sains Islam Malaysia, Bandar Baru Nilai, Nilai 71800, Negeri Sembilan, Malaysia)

Abstract

The investor interest in multi-regional earthquake bonds may drop because high-risk locations are less appealing to investors than low-risk ones. Furthermore, a single parameter (earthquake magnitude) cannot accurately express the severity due to an earthquake. Therefore, the aim of this research is to propose valuing a framework for single earthquake bonds (SEB) using a double parameter trigger type, namely magnitude and depth of earthquakes, based on zone division according to seismic information. The zone division stage is divided into two stages. The first stage is to divide the covered area based on regional administrative boundaries and clustering based on the earthquake disaster risk index (EDRI), and the second stage involves clustering based on magnitude and depth of earthquakes and distance between earthquake events using the K-Means and K-Medoids algorithms. The distribution of double parameter triggers is modeled using the Archimedean copula. The result obtained is that the price of SEB based on the clustering result of EDRI categories and K-Means is higher than the price obtained by clustering EDRI categories and K-Medoids with maturities of less than 5 years. The result of this research is expected to assist the Special Purpose Vehicle in determining the price of SEB.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:3:p:689-:d:1050516
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/11/3/689/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7390/11/3/689/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Jian Liu & Jihong Xiao & Lizhao Yan & Fenghua Wen, 2014. "Valuing Catastrophe Bonds Involving Credit Risks," Mathematical Problems in Engineering, Hindawi, vol. 2014, pages 1-6, April.
    3. 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.
    4. Morteza Tavanaie Marvi & Daniël Linders, 2021. "Decomposition of Natural Catastrophe Risks: Insurability Using Parametric CAT Bonds," Risks, MDPI, vol. 9(12), pages 1-19, December.
    5. Sukono & Hafizan Juahir & Riza Andrian Ibrahim & Moch Panji Agung Saputra & Yuyun Hidayat & Igif Gimin Prihanto, 2022. "Application of Compound Poisson Process in Pricing Catastrophe Bonds: A Systematic Literature Review," Mathematics, MDPI, vol. 10(15), pages 1-19, July.
    6. Indranil Ghosh & Dalton Watts & Subrata Chakraborty, 2022. "Modeling Bivariate Dependency in Insurance Data via Copula: A Brief Study," JRFM, MDPI, vol. 15(8), pages 1-20, July.
    7. 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.
    8. Wen Chao & Huiwen Zou, 2018. "Multiple-Event Catastrophe Bond Pricing Based on CIR-Copula-POT Model," Discrete Dynamics in Nature and Society, Hindawi, vol. 2018, pages 1-9, June.
    9. Zhao, Yang & Yu, Min-Teh, 2020. "Predicting catastrophe risk: Evidence from catastrophe bond markets," Journal of Banking & Finance, Elsevier, vol. 121(C).
    10. Kirti Srivastava & Swaroopa Rani & D. Srinagesh, 2015. "A review of b-value imaging and fractal dimension studies in the Andaman Sumatra subduction," 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. 77(1), pages 97-107, May.
    11. Wen Chao & Polinpapilinho Katina, 2021. "Valuing Multirisk Catastrophe Reinsurance Based on the Cox–Ingersoll–Ross (CIR) Model," Discrete Dynamics in Nature and Society, Hindawi, vol. 2021, pages 1-8, February.
    12. Giuseppe Orlando & Rosa Maria Mininni & Michele Bufalo, 2019. "Interest rates calibration with a CIR model," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 20(4), pages 370-387, September.
    13. Singh, S.R., 2008. "A computational method of forecasting based on fuzzy time series," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(3), pages 539-554.
    14. J. David Cummins, 2008. "CAT Bonds and Other Risk‐Linked Securities: State of the Market and Recent Developments," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 23-47, March.
    15. Zonggang Ma & Chaoqun Ma & Shisong Xiao, 2017. "Pricing Zero-Coupon Catastrophe Bonds Using EVT with Doubly Stochastic Poisson Arrivals," Discrete Dynamics in Nature and Society, Hindawi, vol. 2017, pages 1-14, September.
    16. Ma, Zong-Gang & Ma, Chao-Qun, 2013. "Pricing catastrophe risk bonds: A mixed approximation method," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 243-254.
    17. 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.
    18. Tang, Qihe & Yuan, Zhongyi, 2019. "Cat Bond Pricing Under A Product Probability Measure With Pot Risk Characterization," ASTIN Bulletin, Cambridge University Press, vol. 49(2), pages 457-490, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.
    2. Titi Purwandari & Riaman & Yuyun Hidayat & Sukono & Riza Andrian Ibrahim & Rizki Apriva Hidayana, 2023. "Selecting and Weighting Mechanisms in Stock Portfolio Design Based on Clustering Algorithm and Price Movement Analysis," Mathematics, MDPI, vol. 11(19), pages 1-22, October.
    3. 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.
    4. 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.
    5. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Sukono & Hafizan Juahir & Riza Andrian Ibrahim & Moch Panji Agung Saputra & Yuyun Hidayat & Igif Gimin Prihanto, 2022. "Application of Compound Poisson Process in Pricing Catastrophe Bonds: A Systematic Literature Review," Mathematics, MDPI, vol. 10(15), pages 1-19, July.
    7. 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.
    8. 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.
    9. Eckhard Platen & David Taylor, 2016. "Loading Pricing of Catastrophe Bonds and Other Long-Dated, Insurance-Type Contracts," Research Paper Series 379, Quantitative Finance Research Centre, University of Technology, Sydney.
    10. 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.
    11. Dixon Domfeh & Arpita Chatterjee & Matthew Dixon, 2022. "A Unified Bayesian Framework for Pricing Catastrophe Bond Derivatives," Papers 2205.04520, arXiv.org.
    12. 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.
    13. Burnecki, Krzysztof & Giuricich, Mario Nicoló & Palmowski, Zbigniew, 2019. "Valuation of contingent convertible catastrophe bonds — The case for equity conversion," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 238-254.
    14. Harsh K. Mistry & Domenico Lombardi, 2023. "A stochastic exposure model for seismic risk assessment and pricing of catastrophe bonds," 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. 117(1), pages 803-829, May.
    15. Liu, Haibo & Tang, Qihe & Yuan, Zhongyi, 2021. "Indifference pricing of insurance-linked securities in a multi-period model," European Journal of Operational Research, Elsevier, vol. 289(2), pages 793-805.
    16. 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.
    17. Beer, Simone & Braun, Alexander, 2022. "Market-consistent valuation of natural catastrophe risk," Journal of Banking & Finance, Elsevier, vol. 134(C).
    18. 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.
    19. Titi Purwandari & Riaman & Yuyun Hidayat & Sukono & Riza Andrian Ibrahim & Rizki Apriva Hidayana, 2023. "Selecting and Weighting Mechanisms in Stock Portfolio Design Based on Clustering Algorithm and Price Movement Analysis," Mathematics, MDPI, vol. 11(19), pages 1-22, October.
    20. Jiayi Li & Zhiyan Cai & Yixuan Liu & Chengxiu Ling, 2022. "Extremal Analysis of Flooding Risk and Its Catastrophe Bond Pricing," Mathematics, MDPI, vol. 11(1), pages 1-14, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jmathe:v:11:y:2023:i:3:p:689-:d:1050516. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.