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Modeling Earthquake Risk via Extreme Value Theory and Pricing the Respective Catastrophe Bonds*

Published online by Cambridge University Press:  17 April 2015

Alexandros A. Zimbidis ,
Nickolaos E. Frangos  and
Athanasios A. Pantelous
Alexandros A. Zimbidis
Affiliation:
Department of Statistics, Athens University of Economics and Business, Patision 76, 104 34 Athens, Greece, E-mails: [email protected], [email protected], [email protected]
Nickolaos E. Frangos
Affiliation:
Department of Statistics, Athens University of Economics and Business, Patision 76, 104 34 Athens, Greece, E-mails: [email protected], [email protected], [email protected]
Athanasios A. Pantelous
Affiliation:
Department of Statistics, Athens University of Economics and Business, Patision 76, 104 34 Athens, Greece, E-mails: [email protected], [email protected], [email protected]
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Abstract

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The aim of the paper is twofold. Firstly, to analyze the historical data of the earthquakes in the boarder area of Greece and then to produce a reliable model for the risk dynamics of the magnitude of the earthquakes, using advanced techniques from the Extreme Value Theory. Secondly, to discuss briefly the relevant theory of incomplete markets and price earthquake catastrophe bonds, combining the model found for the earthquake risk and an appropriate model for the interest rate dynamics in an incomplete market framework. The paper ends by providing some numerical results using Monte Carlo simulation techniques and stochastic iterative equations.

Keywords

Extreme Value TheoryCatastrophe BondsMonte Carlo SimulationIterative Stochastic EquationsIncomplete Market
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 37 , Issue 1 , May 2007 , pp. 163 - 183
Copyright
Copyright © ASTIN Bulletin 2007

Footnotes

*

This work was supported by the reinforcement program of Human Research Manpower #8211 “PENED” in the framework of Measure 8.3, Action 8.3.1 of the Operational program of competitiveness #8211; Third Community Support Program.

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