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Catastrophe futures and reinsurance contracts: An incomplete markets approach
Author(s) -
Perrakis Stylianos,
Boloorforoosh Ali
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21880
Subject(s) - reinsurance , futures contract , martingale (probability theory) , economics , financial economics , martingale pricing , risk neutral measure , econometrics , event (particle physics) , mathematical economics , actuarial science , martingale difference sequence , mathematics , statistics , physics , quantum mechanics
We present a theoretical methodology for the pricing of catastrophe (CAT) derivatives with event‐dependent and non‐convex payoffs given the price of a CAT indexed futures contract. We do not assume a fully diversifiable CAT event risk, nor do we assume knowledge of the martingale probability measure beyond the futures price. We derive tight bounds on the contract value and present trading strategies exploiting the mispricing whenever the bounds are violated. We estimate the bounds of the reinsurance contract with data from hurricane landings in Florida. Our method is also applicable when there is no futures market but the price of a CAT‐indexed bond is available.