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Pricing catastrophe insurance derivatives

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  • Muermann, Alexander

Abstract

We investigate the valuation of catastrophe insurance derivatives that are traded at the Chicago Board of Trade. By modeling the underlying index as a compound Poisson process we give a representation of no-arbitrage price processes using Fourier analysis. This characterization enables us to derive the inverse Fourier transform of prices in closed form for every fixed equivalent martingale measure. It is shown that the set of equivalent measures, the set of no-arbitrage prices, and the market prices of frequency and jump size risk are in one-to-one connection. Following a representative agent approach we determine the unique equivalent martingale under which prices in the insurance market are calculated.

Suggested Citation

  • Muermann, Alexander, 2002. "Pricing catastrophe insurance derivatives," LSE Research Online Documents on Economics 24904, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24904
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    File URL: http://eprints.lse.ac.uk/24904/
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    References listed on IDEAS

    as
    1. Kemp, M.H.D., 1997. "Actuaries and Derivatives," British Actuarial Journal, Cambridge University Press, vol. 3(1), pages 51-180, April.
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    5. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    6. O'Brien, Thomas, 1997. "Hedging strategies using catastrophe insurance options," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 153-162, November.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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