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Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach

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Earthquake Catastrophe Bond Pricing Using Extreme Value Theory A Mini-Review Approach.pdf (1.71 MB)

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2022

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MDPI

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Abstract

Earthquake catastrophe bond pricing models (ECBPMs) employ extreme value theory (EVT) to predict severe losses, although studies on EVT’s use in ECBPMs are still rare. Therefore, this study aimed to use a mini-review approach (MRA) to examine the use of EVT and identify the gaps and weaknesses in the methods or models developed. The MRA stages include planning, search and selection, analysis, and interpretation of the results. The selection results showed five articles regarding the application of EVT in ECBPMs. Furthermore, the analysis found the following: First, the generalized extreme value (GEV) could eliminate extreme data in a period. Second, the trigger model using two parameters is better than one, but the study did not discuss the joint distribution of the two parameters. Third, the autoregressive integrated moving average (ARIMA) allows negative values. Fourth, Cox–Ingersoll–Ross (CIR) in-coupon modeling is less effective in depicting the real picture. This is because it has a constant volatility assumption and cannot describe jumps due to monetary policy. Based on these limitations, it is hoped that future studies can develop an ECBPM that reduces the moral hazard.

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Volume 10 Issue 22

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earthquake disaster; bond pricing model; extreme value theory

Citation

Anggraeni W, Supian S, Sukono, Halim NBA. Earthquake Catastrophe Bond Pricing Using Extreme Value Theory: A Mini-Review Approach. Mathematics. 2022; 10(22):4196. https://doi.org/10.3390/math10224196

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https://www.mdpi.com/2227-7390/10/22/4196
 https://www.scopus.com/record/display.uri?eid=2-s2.0-85142493714&origin=resultslist&sort=plf-f&src=s&sid=fedc15ccd0c520324bb318f956de939e&sot=b&sdt=b&s=TITLE-ABS-KEY%28Earthquake+Catastrophe+Bond+Pricing+Using+Extreme+Value%29&sl=95&sessionSearchId=fedc15ccd0c520324bb318f956de939e
 https://oarep.usim.edu.my/handle/123456789/10649

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