Research On Catastrophe Bond Pricing Under Two Trigger Mechanism

In recent years,the occurrence frequency and economic losses caused by catastrophe events in China have been increasing year by year,and the underwriting ability of the insurance and reinsurance markets has been inadequate.At the same time,China does not have a mature catastrophe risk management mechanism,and it mainly relies on government finance and social assistance to make up for economic losses,which makes China's finance face great pressure.The academic research and application of catastrophe risk securitization in foreign countries started earlier.Catastrophe bond is considered to be the most successful catastrophe risk diversification product at present.It spreads the risks originally borne by the insurance market to the huge capital market with the bond trading mode.Catastrophe bonds meet the capital demand of insurance companies,enhance the stability and underwriting capacity of the catastrophe insurance market,and relieve the economic pressure of the country.The pricing of catastrophe bonds is the key to the development of catastrophe bonds,so it is necessary to study the pricing of catastrophe bonds.This thesis constructs two kinds of bond pricing model with different trigger mechanism.First of all,under the industry loss index mechanism,taking earthquake bond as an example,the cumulative loss within the maturity is taken as the trigger of the bond,and the pricing model of zero-coupon bond is constructed using the risk-neutral method.In our model,the cumulative loss of catastrophe and the random interest rate are the decisive factors affecting the bond price.Since catastrophe risk and financial risk are independent,the random interest rate is considered as the risk-free interest rate and assumed as the CIR process.In the current studies,it is assumed that the catastrophe arrival process and the catastrophe loss process are independent.In this thesis,the catastrophe event flow is assumed to be a homogeneous Markov chain,and finally obtain the bond pricing formula under the semi-Markov model.In the empirical research based on seismic data in China,since the catastrophe risk loss data has a thick tail,this thesis uses GPD distribution of the POT model to fit the earthquake over-threshold loss and obtains the dynamic price of bonds under different trigger values and different maturities based on Monte Carlo simulation.Finally,the results of bond price sensitivity analysis show that under the assumptions of fixed interest rate and Log-normal distribution of catastrophe losses,bond prices fluctuate greatly,which reminds bond designers to attach importance to the random interest rate and catastrophe risk in the process of pricing.The composite trigger mechanism takes the industry loss index and the physical parameters of the catastrophe event as the dual trigger index,which not only meets the risk preference of different investors,but also avoids the basis risk and moral hazard of the catastrophe bond.Also taking the earthquake bond as an example,the thesis takes binary model to represent the correlation between the earthquake losses and magnitude.Choose the binary Frank function as the joint distribution function of marginal variables by using the square Euclidian distance standard and comparing the Kendall and Spearman correlation coefficients.Finally,Monte Carlo simulation is used to get the bond price,and we explore the influence of parameter of binary Frank Copula function on the bond price.The results show that the stronger the correlation of marginal variables,the lower the bond price.