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Pricing catastrophe bonds with multistage stochastic programming

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  • Nick Georgiopoulos

    (Bermuda Monetary Authority (BMA))

Abstract

In this paper we present a method of pricing catastrophe bonds (cat bonds) using stochastic programming. Stochastic programming is a method ubiquitous in operations research when decision problems involve uncertainty. We demonstrate the method for pricing cat bonds which bypasses the need to define the equivalent martingale measure or estimate the market price of risk. The price of the cat bond is simply the coupon that needs to be paid that attains a specified return on investment given a set of constraints that define the payoffs.

Suggested Citation

  • Nick Georgiopoulos, 2017. "Pricing catastrophe bonds with multistage stochastic programming," Computational Management Science, Springer, vol. 14(3), pages 297-312, July.
    • Handle: RePEc:spr:comgts:v:14:y:2017:i:3:d:10.1007_s10287-017-0277-6
    DOI: 10.1007/s10287-017-0277-6
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    References listed on IDEAS

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    1. Knut Aase, 1999. "An Equilibrium Model of Catastrophe Insurance Futures and Spreads," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 24(1), pages 69-96, June.
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    3. Dickson,David C. M., 2010. "Insurance Risk and Ruin," Cambridge Books, Cambridge University Press, number 9780521176750.
    4. Geman, Helyette & Yor, Marc, 1997. "Stochastic time changes in catastrophe option pricing," Insurance: Mathematics and Economics, Elsevier, vol. 21(3), pages 185-193, December.
    5. Dassios, Angelos & Jang, Jiwook, 2003. "Pricing of catastrophe reinsurance and derivatives using the Cox process with shot noise intensity," LSE Research Online Documents on Economics 2849, London School of Economics and Political Science, LSE Library.
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    Cited by:

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