Research On Pricing Catastrophe Swaps Based On The Copula Function

As a country in which catastrophes happen frequently, China has been using the financial subsidies to make up for catastrophe losses in the past few decades. This unsustainable practice appeared to be changed at the end of 2013. By the end of 2013, Yunnan and Shenzhen became the first pilot cit ies of catastrophe insurance, which has been the ice-breaking trip of Chinese catastrophe insurance, and also a good opportunity to develop the catastrophe derivatives.Catastrophe Swaps is a new developed derivative instrument, which has lots of advantages like simple process, easy operation, low transaction cost compared with other derivatives. Particularly, the establishment of the New York Catastrophe Risk Exchange(CATEX) provides a better trading platform for the Catastrophe Swaps. However, currently only a few scholars are on the research of Catastrophe Swaps because the exchange data is unknown to the public. On the basis of the existing few literatures of Catastrophe Swaps, this article mainly refers to the pricing and relevant theory research results of other catastrophe derivatives, to conduct a Catastrophe Swaps pricing theory model from the financial market and catastrophe l oss module.Based on the above model, this article assumes that the Catastrophe Swaps has multiple trigger mechanism, and use the Copula function introduced in the third chapter to fit the joint distributions of the trigger events. In the last chapter this article carries on the empirical test to this model. We select 24 years' data of earthquake magnitude and loss value from 1990 to 2013 in China as the trigger condition, firstly make sure the edges of their distribution functions, and then use the Copula function mostly used to fit them, Square of the Euclidean Distance is used to select the best Copula function, and the price of Catastrophe Swaps are calculated then. The empirical result shows that, the price of the Catastrophe Swaps has opposite trend with the varies of both triggers and the risk-free market interest rate. However, the sensitivity of the interest rate is much lower than the triggers. Substantially, the result of empirical research matches the basic theoretical model.