A Model for Earthquake Swap Pricing and Its Sensitivity Analysis in Iran
Subject Areas :
Financial engineering
Nasrollah Mahmoudpour
1
,
Abodolsadeh neisy
2
*
,
Moslem Peymany
3
1 - Department of Finance and Banking, Faculty of management & accounting, Allameh Tabataba'i University, Tehran, Iran
2 - Department of Mathematics, Faculty of mathematics Science and Computer, Allameh Tabataba University, Tehran, Iran
3 - Department of finance and banking, Faculty of management and accounting, Allameh Tabataba University, Tehran, Iran.
Received: 2019-07-28
Accepted : 2019-10-01
Published : 2019-12-22
Keywords:
Sensitivity analysis,
finite difference method,
Catastrophe Swap Pricing,
Earthquake loose in Iran,
Abstract :
In recent years, increasing economic losses as a result of natural disasters are one of the main challenges fronting the insurance industry and researchers to discover original financial instruments so as to transmit disaster risks and minimize economic losses. In the present article, a model is suggested for catastrophe swap pricing with deterministic loss fluctuations in order to decrease the risk of insurance and reinsurance companies in Iran. The research is retrospective and applied; the data collection method is the library, and for the data collection use the documents. For the full data extraction, the correlation method is applied, For the purpose of extracting the complete data, the correlation method is used, all damages of earthquakes that have been fatal, destructive and affecting in the period 1927 to 2018 in Iran, have been investigated. The probability of the deterministic loss occurrence and severity are regarded to be Brownian motion of jump-diffusion. The extracted integral-differential model is converted into the standard differential one, and the answers are estimated via finite difference method and Matlab software. The changes to the suggested model are explored through the Lambda sensitivity analysis. As a final point, the model is implemented with real data of earthquake losses in Iran, which is extracted from the EM-DAT database and the regression results. Based on the results of the study, the price of catastrophe swap securities for less loss than the threshold has regular upward trend; however, once loss reached and passed the threshold, prices will drop dramatically.
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