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Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength

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dc.contributor.authorRiza Andrian Ibrahim
dc.contributor.authorRiza Andrian Ibrahim
dc.contributor.authorHerlina Napitupulu
dc.contributor.authorRose Irnawaty Ibrahim
dc.date.accessioned2024-10-18T17:04:27Z
dc.date.available2024-10-18T17:04:27Z
dc.date.issued2024
dc.date.submitted2024-10-17
dc.descriptionMathematics Volume 12 Issue 6
dc.description.abstractTraditional insurance’s earthquake contingency costs are insufficient for earthquake funding due to extreme differences from actual losses. The earthquake bond (EB) links insurance to capital market bonds, enabling higher and more sustainable earthquake funding, but challenges persist in pricing EBs. This paper presents zero-coupon and coupon-paying EB pricing models involving the inconstant event intensity and maximum strength of extreme earthquakes under the risk-neutral pricing measure. Focusing on extreme earthquakes simplifies the modeling and data processing time compared to considering infinite earthquake frequency occurring over a continuous time interval. The intensity is accommodated using the inhomogeneous Poisson process, while the maximum strength is modeled using extreme value theory (EVT). Furthermore, we conducted model experiments and variable sensitivity analyses on EB prices using earthquake data from Indonesia’s National Disaster Management Authority from 2008 to 2021. The sensitivity analysis results show that choosing inconstant intensity rather than a constant one implies significant EB price differences, and the maximum strength distribution based on EVT matches the data distribution. The presented model and its experiments can guide EB issuers in setting EB prices. Then, the variable sensitivities to EB prices can be used by investors to choose EB according to their risk tolerance.
dc.identifier.citationRiza Andrian Ibrahim, None Sukono, Herlina Napitupulu, & Rose Irnawaty Ibrahim. (2024). Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength. Mathematics, 12(6). https://doi.org/10.3390/math12060786
dc.identifier.doi10.3390/math12060786
dc.identifier.epage21
dc.identifier.issn2227-7390
dc.identifier.issue786
dc.identifier.spage1
dc.identifier.urihttps://www.mdpi.com/2227-7390/12/6/786
dc.identifier.urihttps://oarep.usim.edu.my/handle/123456789/23682
dc.identifier.urihttps://www.scopus.com/record/display.uri?eid=2-s2.0-85188959881&origin=resultslist&sort=plf-f&src=s&sid=37b64b80e846650e755a15d02a236d4c&sot=b&sdt=b&s=TITLE-ABS-KEY%28Earthquake+Bond+Pricing+Model+Involving+the+Inconstant+Event+Intensity+and+Maximum+Strength%29&sl=106&sessionSearchId=37b64b80e846650e755a15d02a236d4c&relpos=0
dc.identifier.volume12
dc.language.isoen_US
dc.publisherMDPI
dc.relation.ispartofMathematics
dc.relation.issn2227-7390
dc.relation.journalMathematics
dc.subjectearthquake bonds
dc.subjectinconstant event intensity
dc.subjectmaximum strength
dc.subjectinhomogeneous Poisson process
dc.subjectextreme value theory
dc.subjectrisk-neutral pricing measure
dc.titleEarthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength
dc.typetext::journal::journal article::research article
dspace.entity.typePublication
oaire.citation.endPage21
oaire.citation.issue6
oaire.citation.startPage1
oaire.citation.volume12
oairecerif.author.affiliation#PLACEHOLDER_PARENT_METADATA_VALUE#
oairecerif.author.affiliation#PLACEHOLDER_PARENT_METADATA_VALUE#
oairecerif.author.affiliation#PLACEHOLDER_PARENT_METADATA_VALUE#
oairecerif.author.affiliationUniversiti Sains Islam Malaysia

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