Estimating the basis risk of index-linked hedging strategies using multivariate extreme value theory

Kellner, Ralf; Gatzert, Nadine

doi:10.1016/j.jbankfin.2013.07.043

Cited by 8 publications

(2 citation statements)

References 37 publications

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“…The normalizing constants c n and d n in (4.1) and the scale function a(•) in (4.3) are all explicitly expressed. For applications of EVT to insurance and finance in general, we refer the reader to Embrechts et al (1999), Bali (2007), Donnelly and Embrechts (2010), Kellner andGatzert (2013), andMcNeil et al (2015), among others, while for applications of EVT to pricing CAT bonds in particular, we refer the reader to Zimbidis et al (2007), Li et al (2008), Chen and Cummins (2010), Shao et al (2015), and Aviv (2018), among others.…”

Section: Highlights Of Evtmentioning

confidence: 99%

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

Tang¹,

Yuan²

2019

ASTIN Bull.

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Frequent large losses from recent catastrophes have caused great concerns among insurers/reinsurers, who then turn to seek mitigations of such catastrophe risks by issuing catastrophe (CAT) bonds and thereby transferring the risks to the bond market. Whereas, the pricing of CAT bonds remains a challenging task, mainly due to the facts that the CAT bond market is incomplete and that the pricing usually requires knowledge about the tail of the risks. In this paper, we propose a general pricing framework based on a product pricing measure, which combines a distorted probability measure that prices the catastrophe risks underlying the CAT bond with a risk-neutral probability measure that prices interest rate risk. We also demonstrate the use of the peaks over threshold (POT) method to uncover the tail risk. Finally, we conduct case studies using Mexico and California earthquake data to demonstrate the applicability of our pricing framework.

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Section: Highlights Of Evtmentioning

confidence: 99%

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

Tang¹,

Yuan²

2019

ASTIN Bull.

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“…As pointed out by Kellner and Gatzert (2013), index-linked hedging strategies are of high relevance to the financial and insurance industry. Such strategies link the payoff of a contract to the development of an index.…”

Section: Application To Index-linked Hedging Strategiesmentioning

confidence: 99%

Risk reducers in convex order

Tang

Zhang

2016

Insurance: Mathematics and Economics

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Given a risk position X, a random addition Z is called a risk reducer for X if the new position X + Z is less risky than X + E[Z] in convex order. We utilize the concept of convex hull to give a structural description of risk reducers in the case of an atomless probability space. Then we study risk reducers that are fully dependent on X. Applications to multivariate stochastic ordering, index-linked hedging strategies, and optimal reinsurance are proposed.

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Asymptotic Dependence and Its Impact on Hedging Effectiveness: An Examination of Stock, Currency, and Commodity Futures

Sharma,

Karmakar

2024

Journal of Futures Markets

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This study measures the asymptotic dependence between spot and futures losses and investigates its impact on hedging effectiveness using data from stock, currency, and commodity markets. The findings reveal that stock futures contracts show strong asymptotic dependence, while currency futures have weak asymptotic dependence and most commodity futures lack asymptotic dependence with the underlying spots. Further, stock futures have the highest hedging effectiveness, while commodity and currency futures show low hedging effectiveness for downside risk. Results also suggest that asymptotic dependence is critical for minimum‐variance hedging. Asymptotic dependence increases with the hedging horizon, leading to a better hedging performance of the futures. It also appears that the hedging strategies sensitive to asymptotic dependence perform better than the competing models. The results for the entire period and the subsample periods offer similar conclusions.

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Estimating the basis risk of index-linked hedging strategies using multivariate extreme value theory

Cited by 8 publications

References 37 publications

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

Risk reducers in convex order

Asymptotic Dependence and Its Impact on Hedging Effectiveness: An Examination of Stock, Currency, and Commodity Futures

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