Pricing Research In Catastrophe Bond Base On Extreme Theory

Since the 1990s, the continually rising trend in the frequency of occurrence and the extent of catastrophe losses is posing serious challenges to the global insurance industry. Facing with this challenge, the western developed countries shift attention towards the strong capital market with abundant capital and take the lead in devising financial innovations, which promotes the rise of Catastrophe Risk Securitization.Based on the above background and the systematic organization of related domestic and foreign researches on Catastrophe risk bonds, this paper fits the distribution model of earthquake loss in China use the generalized Pareto distribution from the perspective of extreme value theory, studies the general mechanism of catastrophe bond pricing, and then build the Catastrophe Bonds pricing model applicable to China.First of all, we have a brief review on the related research of catastrophe risk Securitization products and the generalized Pareto distribution of extreme value theory in this paper; then with the excellent properties of extreme value theory, we fit the tail distribution model of earthquake loss and build the distribution model of earthquake loss in China by using the GPD model in extreme value theory, and the fitting results are very good; On the basis of built Loss Distribution Model, we further put forward the Catastrophe Bonds pricing model in China, which takes into account of Stochastic interest rate process, distribution of earthquake loss, as well as moral hazard, basis risk and default risk to meet the actual pricing of catastrophe bonds. At last, this paper analyzes the price trend in the built Earthquake Bond Pricing Model with the method of Monte Carlo simulation.