Estimation of the Catastrophe Bonds Price by using Risk Neutral Measurement
Sukono1, Dwi Susanti2, Eman Lesmana3, Ghasani Sharfina4, Mustafa Mamat5, Puspa Liza Ghazali6, Mohamad Afendee Mohamed7
1Sukono, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Indonesia.
2Dwi Susanti, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Indonesia.
3Eman Lesmana, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Indonesia.
4Ghasani Sharfina, Study Program of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Indonesia.
5Mustafa Mamat, Faculty of Informatics and Computing, Universiti Sultan Zainal Abidin, Terengganu, Malaysia.
6Puspa Liza Ghazali, Faculty of Economic and Management Science, Universiti Sultan Zainal Abidin, Terengganu. Malaysia.
7Mohamad Afendee Mohamed, Faculty of Informatics and Computing, Universiti Sultan Zainal Abidin, Terengganu, Malaysia.
Manuscript received on November 11, 2019. | Revised Manuscript received on November 20 2019. | Manuscript published on 30 November, 2019. | PP: 11460-11463 | Volume-8 Issue-4, November 2019. | Retrieval Number: B3001078219/2019©BEIESP | DOI: 10.35940/ijrte.B3001.118419
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© The Authors. Blue Eyes Intelligence Engineering and Sciences Publication (BEIESP). This is an open access article under the CC-BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: Catastrophe Bonds (CAT bonds) or disaster bonds are securities products that work by transferring risk in the form of natural disaster losses to the capital market, so that it is necessary to estimate CAT bond prices. This study intends to discuss the model to determine the price of CAT bonds in arbitrage-free scope based on the approach of risk neutral measurement. The data used is extreme data in the form of losses due to natural disasters in the range of 2000-2019. There are several stages carried out in this study. The first step is to calculate descriptive data statistics. Then, estimating the data parameters using the Maximum Likelihood Estimation (MLE) method assuming the data distributed Generalized Extreme Value (GEV). Next, determine the price of CAT bond using the formula of risk neutral measurement. From the results of the analysis carried out, the CAT bond price is USD98.63, and there is the effect of risk neutral measurement on the price of CAT bonds paid by investors.
Keywords: CAT Bond, Arbitrage-Free, Generalized Extreme Value, Risk Neutral Measurement.
Scope of the Article: Measurement & Performance Analysis.