Valuation of Catastrophe Equity Puts With Markov-Modulated Poisson Processes
Journal
Journal of Risk and Insurance
Journal Volume
78
Journal Issue
2
Pages
447-473
Date Issued
2011
Author(s)
Abstract
We derive the pricing formula for catastrophe equity put options (CatEPuts) by assuming catastrophic events follow a Markov Modulated Poisson process (MMPP) whose intensity varies according to the change of the Atlantic Multidecadal Oscillation (AMO) signal. U.S. hurricanes events from 1960 to 2007 show that the CatEPuts pricing errors under the MMPP(2) are smaller than the PP by 30 percent to 66 percent. The scenario analysis indicates that the MMPP outperforms the exponential growth pattern (EG) if the hurricane intensity is the AMO signal, whereas the EG may outperform the MMPP if the future climate is warming rapidly. © The Journal of Risk and Insurance, 2011.
SDGs
Type
journal article