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RESEARCH PRODUCT
Catastrophic risks and the pricing of catastrophe equity put options
Michele Leonardo BianchiGian Luca TassinariMassimo ArnoneAnna Grazia Quarantasubject
Market capitalizationSettore SECS-P/11 - Economia degli Intermediari Finanziari0211 other engineering and technologiesContext (language use)02 engineering and technologyBlack–Scholes modelImplied volatilityManagement Information SystemsCompound Poisson processG1Economics021108 energyVariance gammaG12Hedge (finance)C2Original Paper021103 operations researchActuarial scienceCompound PoissonCatastrophe equity put options · Variance gamma · Compound Poisson · Double-calibrationEquity (finance)Double-calibrationVariance-gamma distributionCatastrophe equity put options · Variance gamma · Compound Poisson ·Double-calibrationC63G22Catastrophe equity put optionsInformation Systemsdescription
In this paper, after a review of the most common financial strategies and products that insurance companies use to hedge catastrophic risks, we study an option pricing model based on processes with jumps where the catastrophic event is captured by a compound Poisson process with negative jumps. Given the importance that catastrophe equity put options (CatEPuts) have in this context, we introduce a pricing approach that provides not only a theoretical contribution whose applicability remains confined to purely numerical examples and experiments, but which can be implemented starting from real data and applied to the evaluation of real CatEPuts. We propose a calibration framework based on historical log-returns, market capitalization and option implied volatilities. The calibrated parameters are then considered to price CatEPuts written on the stock of the main Italian insurance company over the high volatile period from January to April 2020. We show that the ratio between plain-vanilla put options and CatEPuts strictly depends on the shape of the implied volatility smile and it varies over time.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2021-01-01 | Computational Management Science |