Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

Hwa Sung Kim; Bara Kim; Jerim Kim

doi:10.1016/j.econmod.2014.04.007

Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

Hwa Sung Kim, Bara Kim, Jerim Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

Abstract

A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.

Original language	English
Pages (from-to)	15-22
Number of pages	8
Journal	Economic Modelling
Volume	41
DOIs	https://doi.org/10.1016/j.econmod.2014.04.007
Publication status	Published - 2014 Aug

Keywords

Bivariate exponential distribution
Catastrophe equity put option
Option pricing

ASJC Scopus subject areas

Economics and Econometrics

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10.1016/j.econmod.2014.04.007

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title = "Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses",

abstract = "A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.",

keywords = "Bivariate exponential distribution, Catastrophe equity put option, Option pricing",

author = "Kim, {Hwa Sung} and Bara Kim and Jerim Kim",

note = "Funding Information: B. Kim's research was supported by Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology ( 2011–0025576 ). ",

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AU - Kim, Bara

AU - Kim, Jerim

N1 - Funding Information: B. Kim's research was supported by Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology ( 2011–0025576 ).

PY - 2014/8

Y1 - 2014/8

N2 - A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.

AB - A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options.

KW - Bivariate exponential distribution

KW - Catastrophe equity put option

KW - Option pricing

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SN - 0264-9993

VL - 41

SP - 15

EP - 22

JO - Economic Modelling

JF - Economic Modelling

ER -

Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

Abstract

Keywords

ASJC Scopus subject areas

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