Valuation of catastrophe equity put options with correlated default risk and jump risk

Bi, Hongwei; Wang, Guanying; Wang, Xingchun

doi:10.1016/j.frl.2018.08.014

Cited by 7 publications

(1 citation statement)

References 13 publications

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“…Recently, Bi et al. ( 2019 ) proposed a model assuming that catastrophic events and non-catastrophic events both follow Markov modulated Poisson processes and they defined a pricing formula for CatEPuts allowing for correlated jump risk and default risk.…”

Section: Hedging Catastrophic Riskmentioning

confidence: 99%

Catastrophic risks and the pricing of catastrophe equity put options

et al. 2021

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In this paper, after a review of the most common financial strategies and products that insurance companies use to hedge catastrophic risks, we study an option pricing model based on processes with jumps where the catastrophic event is captured by a compound Poisson process with negative jumps. Given the importance that catastrophe equity put options (CatEPuts) have in this context, we introduce a pricing approach that provides not only a theoretical contribution whose applicability remains confined to purely numerical examples and experiments, but which can be implemented starting from real data and applied to the evaluation of real CatEPuts. We propose a calibration framework based on historical log-returns, market capitalization and option implied volatilities. The calibrated parameters are then considered to price CatEPuts written on the stock of the main Italian insurance company over the high volatile period from January to April 2020. We show that the ratio between plain-vanilla put options and CatEPuts strictly depends on the shape of the implied volatility smile and it varies over time.

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Section: Hedging Catastrophic Riskmentioning

confidence: 99%