Record Details

Pricing Catastrophe Insurance Products in Markov Jump Diffusion Models

Journal of Financial Studies

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Title Pricing Catastrophe Insurance Products in Markov
Jump Diffusion Models
 
Creator Shih-Kuei Lin
David Shyu
Chia-Chien Chang
 
Description For catastrophic events, the assumption that catastrophe claims occur in terms of the Poisson process is
inadequate as it has constant intensity. This article proposes Markov Modulated Poisson process to model the
arrival process for catastrophic events. Under this process, the underlying state is governed by a homogenous
Markov chain, and it is the generalization of Cummins and Geman (1993, 1995), Chang, Chang, and Yu
(1996), Geman and Yor (1997) and Vaugirard (2003a, 2003b). We apply Markov jump diffusion model to
derive pricing formulas for catastrophe insurance products, included catastrophe futures call option,
catastrophe PCS call spread and catastrophe bond. We use the data of PCS index and the annual number of
hurricane events during 1950 to 2004 to test the quality of the fitting under the MMPP and the PP. The
numerical analysis shows how the catastrophe insurance products prices are related to jump rate of catastrophe
events, standard deviation of jump size, and mean of jump size.

Key words: Markov modulated Poisson process, Markov jump diffusion model, Futures call option, Catastrophe PCS call spread, Catastrophe bond.
 
Publisher Journal of Financial Studies
財務金èžå­¸åˆŠ
 
Date 2011-05-27
 
Type —
 
Format application/pdf
 
Identifier http://www.jfs.org.tw/index.php/jfs/article/view/2011127
 
Source Journal of Financial Studies; Vol 16, No 2 (2008); 1
財務金èžå­¸åˆŠ; Vol 16, No 2 (2008); 1
 
Language —