Pricing catastrophe equity puts with counterparty risks under Markov-modulated,default-intensity processes |
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| Affiliation: | 1. Department of Business Administration, National Chin-Yi University of Technology, No. 57, Sec. 2, Zhongshan Rd., Taiping Dist., Taichung 41170, Taiwan;2. Department of Business Administration, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang Dist., New Taipei City 242062, Taiwan;3. Department of Money and Banking, National Chengchi University, No. 64, Sec. 2, Zhinan Rd., Taipei 11605, Taiwan;1. Department of Business Administration, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang Dist., New Taipei City, 24205, Taiwan, ROC;2. Division of Offshore Banking Unit, Kaohsiung Bank, No. 168, Po Ai 2nd Rd., Tsoying Dist., Kaohsiung, 81357, Taiwan, ROC;1. Department of Business Administration, Ono Academic College, Zahal 104 Street, Kiryat Ono Zip Code: 5545173, Israel;2. College of Business, Zayed University, Abu Dhabi, United Arab Emirates;3. Institute of Business Research, University of Economics Ho Chi Minh City, Viet Nam;4. School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia;5. Institute of Business Research and CFVG, University of Economics Ho Chi Minh City, Viet Nam;1. School of Economics, Hainan University, Haikou 570228, China;2. UQ Business School, The University of Queensland, Brisbane, Queensland 4072, Australia;3. School of Economics and Management, Nanjing University of Science and Technology, Nanjing, 210094, China;4. Management School, Hainan University, Haikou 570228, China;1. Department of Applied Economics, National Chiayi University, No.580 Sinmin Rd., Chiayi City, 60054, Taiwan;2. Institute of Economics, National Sun Yat-sen University, No. 70 Lienhai Rd., Kaohsiung City, 80424, Taiwan;1. Seoul National University Business School, 1 Gwanak Ro, Gwanak Gu, Seoul 08826, Korea;2. Department of Statistics and Actuarial Science, Soongsil University, 369 Sangdo-Ro, Dongjak-Gu, Seoul 06978, Korea |
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| Abstract: | According to the observation of the catastrophic events with regime-switching phenomena and default rate varying with economic condition, we extend the results of Chang et al. (2011) and also take the default rate varying with economic condition into consideration by using the Markov-modulated reduced-form model. In order to value options under stochastic interest rates and a default intensity environment, we employ Girsanov’s theorem to obtain two different forward measures and to derive a pricing formula. We also conduct numerical analyses using Monte Carlo simulations to illustrate the influence of the recovery rate, the time to maturity, the frequency of catastrophic events, and the effect of counterparties’ default intensity on the catastrophe equity put price. |
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| Keywords: | Catastrophe equity put Counterparty risk Stochastic interest rate Forward measure Monte Carlo simulation |
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