How Financial Theory Applies to Catastrophe-Linked Derivatives--An Empirical Test of Several Pricing Models

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dc.contributor.author Balbás, Alejandro
dc.contributor.author Longarela, Iñaki R.
dc.contributor.author Lucia, Julio J.
dc.date.accessioned 2010-01-13T09:57:47Z
dc.date.available 2010-01-13T09:57:47Z
dc.date.issued 1999-12
dc.identifier.bibliographicCitation The Jouirnal of Risk and Insutrance, 1999, Vol. 66, No. 4, p.551-582.
dc.identifier.issn 00224367
dc.identifier.uri http://hdl.handle.net/10016/6359
dc.description.abstract This paper discusses the PCS Catastrophe Insurance Option Contracts, pro- viding empirical support on the level of correspondence between real quotes and standard financial theory. The highest possible precision is incorpo- rated since the real quotes are perfectly synchronized and the bid-ask spread is always considered. A static setting is assumed and the main topics of arbitrage, hedging, and portfolio choice are involved in the analysis. Three significant conclusions are reached. First, the catastrophe derivatives may often be priced by arbitrage methods, and the paper provides some examples of practical strategies that were available in the market. Second, hedging arguments also yield adequate criteria to price the derivatives, and some real examples are provided as well. Third, in a variance aversion context many agents could be interested in selling derivatives to invest the money in stocks and bonds. These strategies show a suitable level in the variance for any desired expected return. Furthermore, the methodology here ap- plied seems to be quite general and may be useful to price other derivative securities. Simple assumptions on the underlying asset behavior are the only required conditions.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.publisher Blackwell Publishing
dc.rights ©Blackwell Publishing
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title How Financial Theory Applies to Catastrophe-Linked Derivatives--An Empirical Test of Several Pricing Models
dc.type article
dc.type.review PeerReviewed
dc.description.status Publicado
dc.subject.eciencia Empresa
dc.rights.accessRights openAccess
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