Research on the Pricing of Global Drought Catastrophe Bonds

Abstract

The rapid development of catastrophe bonds provides a new idea for catastrophe risk dispersion, since its traditional means fail to afford the economic losses caused by the global drought catastrophe. With the deepening of the concept of the community with a shared future for mankind, there is an opportunity to issue global drought catastrophe bonds through international cooperation. Based on the data of global drought catastrophe losses from 1900 to 2018, this paper selects 21 countries as the primary participants of international cooperation and studies the pricing of drought catastrophe bonds by the POT model and high quantile estimation. The results show that the first-class bond has a 10% occurrence probability with the trigger point of $252.54 million, and the second-class one has a 35% occurrence probability with the trigger point being $117.13 million. In line with high quartile estimates, the one-year principal-protected catastrophe bonds with a face value of $1,000 are valued at $957.14 and $939.29, respectively. Besides, the principal portion of the lost bonds is $912.50 and $783.04, while the total of it is $867.86 and $626.79, respectively.

Relevance of financial development and fiscal stability in dealing with disasters in Emerging Economies

“…Using a panel auto-regression approach, Raddatz (2007) quanti es the impact of various external shocks, natural disasters among them, in low-income countries. He nds that climate [8] and humanitarian [9] disasters result in decreases in real per-capita GDP of 2% and 4%, respectively, one year after the event [10] . In the same vein, Noy (2009) nds that the amount of property damage incurred during a disaster is a negative determinant of GDP growth performance using extensive panel data from 1900 to 2008.…”

“…[9] It includes famines and epidemics. [10] Geological disasters have a small and non-signi cant impact on output. Although this type of events are more destructive, the reason probably is the number of observations in the sample.…”

“…The literature on CAT bonds is recent and there are a few studies that analyses the relationship between this instrument and its effects. Most of the literature is oriented to study the methods to design this instrument to diversify the risk (Coval, Jurek and Stafford, 2009;Deng et al, 2020;Goda, 2021). As it was mentioned above, the CAT bond is an instrument that can be used in advanced and emerging economies following the risk disaster management and the risk layering approach.…”

Estimation of the Extreme Distribution Model of Economic Losses Due to Outbreaks Using the POT Method with Newton Raphson Iteration

“…According to Deng et al (2020), High Quantile Estimation (HQE) model is a model used to determine the -quantile of the extreme distribution, where ( ( ) ). If ( ) is defined, then the HQE model of equation ( 12) can be determined by the following equation:…”

Pricing Multi-event Triggered Catastrophe Bonds Based on Copula-POT Model

“…This hybrid trigger mechanism can avoid basis risk and moral hazard with reduced triggering risk, attracting investors with a low risk appetite in the market. In addition to understanding the tail behavior of the marginal trigger indicators within the framework of extreme value theory [14][15][16][17][18] , the dependency among multiple trigger indicators need to be considered through copula approach [19][20][21] .…”