Publication: Modeling Multiple-event Catastrophe Bond Prices Involving the Trigger Event Correlation, Interest, and Inflation Rates
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Date
2022
Journal Title
Journal ISSN
Volume Title
Publisher
MDPI
Abstract
The issuance of multiple-event catastrophe bonds (MECBs) has the potential to increase in the next few years. This is due to the increasing trend in the frequency of global catastrophes, which makes single-event catastrophe bonds (SECBs) less relevant. However, there are obstacles to issuing MECBs since the pricing framework is still little studied. Therefore, this study aims to develop such a new pricing framework. The model uniquely involves three new variables: the trigger event correlation, interest, and inflation rates. The trigger event correlation rate was accommodated by the involvement of the copula while the interest and inflation rates were simultaneously considered using an integrated autoregressive vector stochastic model. After the model was obtained, the model was simulated on storm catastrophe data in the United States. Finally, the effect of the three variables on MECB prices was also analyzed. The analysis results show that the three variables make MECB prices more fairly than other models. This research is expected to guide special purpose vehicles to set fairer MECB prices and can also be used as a reference for investors in choosing MECBs based on the rates of trigger event correlation and the real interest they can expect.
Description
Volume 10 Issue 24
Keywords
multiple-event catastrophe bond; trigger event correlation rate; interest rate; inflation rate; copula; integrated autoregressive vector
Citation
Sukono; Ibrahim, R.A.; Saputra, M.P.A.; Hidayat, Y.; Juahir, H.; Prihanto, I.G.; Halim, N.B.A. Modeling Multiple-Event Catastrophe Bond Prices Involving the Trigger Event Correlation, Interest, and Inflation Rates. Mathematics 2022, 10, 4685. https:// doi.org/10.3390/math10244685