Modelling and pricing of catastrophe risk bonds with a temperature-based agricultural application

N. Karagiannis, H. Assa, A. A. Pantelous, C. G. Turvey

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

Catastrophe risk bonds are always within a multi-asset class portfolio of alternative risk premia in many hedge funds. In this paper, we consider an over-the-counter insurance contract on catastrophe risk between an insurance company and a hedge-fund. The contract acts as a bond within which the insurance company, which issues the bond, pays payments higher than the market risk-free interest, in order to be insured against the risk of a predefined natural catastrophe. The contract is priced by the utility indifference pricing method. We apply our framework to price agricultural catastrophe bonds in two cities in Iran where their harvests are exposed to the risk of low temperature.

Original languageEnglish
Pages (from-to)1949-1959
Number of pages11
JournalQuantitative Finance
Volume16
Issue number12
DOIs
Publication statusPublished - 1 Dec 2016
Externally publishedYes

Keywords

  • Agricultural catastrophes
  • Catastrophe risk bonds
  • Hedge fund
  • Insurance
  • Over the counter (OTC)
  • Utility indifference pricing method

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