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Department Seminar by Zhongyi Yuan, Pennsylvania State UniversityExport this event to calendar

Thursday, November 24, 2016 — 4:00 PM EST

An Extreme Value Approach to the Pricing and
Basis Risk Characterization of ILS

Insurance-Linked Securities (ILS) as a channel to transfer catastrophe risks to the capital market have been widely used by insurers to enhance their risk bearing capacity. They have developed from covering one single area/peril to multiple, and in the meantime, while traditional ILS are typically linked to natural catastrophe risks only, recent innovations have introduced ILS that are also linked to broader financial risks.


We propose a general pricing framework with a pricing measure that combines a risk-neutral measure, which prices the financial risks, and a distorted measure, which prices the natural catastrophe risks. We then use Catastrophe (CAT) bonds as an example to discuss their pricing. Furthermore, since the hedging by ILS may not be a perfect one for insurers, we propose two models to characterize the hedging basis risk, using dual-triggered Industry Loss Warranties (ILW) as an example. In our analysis we employ an extreme value approach to approximate the distribution of the ILS triggers. Finally, we show a few numerical examples
to illustrate the results.

Location 
Mathematics 3
M3 3127

,
Canada

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