Pricing of Catastrophe Risk and the Implied Volatility Smile
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2016-07-22
Author(s)
Abstract (De)
Property-casualty (P&C) insurers are exposed to rare but severe natural disasters. This paper analyzes the relation between catastrophe risk and the implied volatility smile of insurance stock options. We find that the slope is significantly steeper compared to non-financials and other financial institutions. We show that this effect has increased over time, suggesting a higher risk compensation for catastrophic events. We are able to link the insurance-specific tail risk component derived from options with the risk spread from catastrophe bonds. Our results provide an accurate, high-frequency calculation for catastrophe risk linking the traditional derivatives market with insurance-linked securities (ILS).
Language
English
Keywords
Implied volatility
Options
Catastrophe risk
Tail risk
Natural disasters
HSG Classification
contribution to scientific community
HSG Profile Area
None
Publisher
SoF - HSG
Publisher place
St. Gallen
Volume
2016/17
Number
17
Pages
51
Subject(s)
Division(s)
Eprints ID
249096
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Name
16_17_Ben Ammar_Pricing of Catastrophe Risk and the Implied Volatility Smile.pdf
Size
912.31 KB
Format
Adobe PDF
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