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Pricing catastrophe insurance derivatives

Muermann, Alexander (2002) Pricing catastrophe insurance derivatives. Financial Markets Group Discussion Papers (400). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We investigate the valuation of catastrophe insurance derivatives that are traded at the Chicago Board of Trade. By modeling the underlying index as a compound Poisson process we give a representation of no-arbitrage price processes using Fourier analysis. This characterization enables us to derive the inverse Fourier transform of prices in closed form for every fixed equivalent martingale measure. It is shown that the set of equivalent measures, the set of no-arbitrage prices, and the market prices of frequency and jump size risk are in one-to-one connection. Following a representative agent approach we determine the unique equivalent martingale under which prices in the insurance market are calculated.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.ac.uk
Additional Information: © 2002 The Author
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited: 19 Aug 2009 10:55
Last Modified: 02 Nov 2022 15:39
URI: http://eprints.lse.ac.uk/id/eprint/24904

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