Multiple-Event Catastrophe Bond Pricing Based on CIR-Copula-POT Model

Abstract

Catastrophe events are attracting increased attention because of their devastating consequences. Aimed at the nonlinear dependency and tail characteristics of different triggered indexes of multiple-event catastrophe bonds, this paper applies Copula function and the extreme value theory to multiple-event catastrophe bond pricing. At the same time, floating coupon and principal payoff structures are adopted instead of fixed coupon and principal payoff structures, to reduce moral hazard and improve bond attractiveness. Furthermore, we develop a CIR-Copula-POT bond pricing model with CIR stochastic rate and estimate flood multiple-event triggered catastrophe bond price using Monte Carlo simulation method. Finally, we implement the sensitivity analysis to show how catastrophe intensity, maturity date, and the dependence affect the prices of catastrophe bonds.