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Mathematical Problems in Engineering
Volume 2014, Article ID 563086, 6 pages
http://dx.doi.org/10.1155/2014/563086
Research Article

Valuing Catastrophe Bonds Involving Credit Risks

1School of Economics and Management, Changsha University of Science and Technology, Changsha 410004, China
2Press, Hunan Normal University, Changsha 410081, China
3Business School, Central South University, Changsha 410083, China

Received 12 January 2014; Accepted 1 April 2014; Published 17 April 2014

Academic Editor: Wei Chen

Copyright © 2014 Jian Liu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Catastrophe bonds are the most important products in catastrophe risk securitization market. For the operating mechanism, CAT bonds may have a credit risk, so in this paper we consider the influence of the credit risk on CAT bonds pricing that is different from the other literature. We employ the Jarrow and Turnbull method to model the credit risks and get access to the general pricing formula using the Extreme Value Theory. Furthermore, we present an empirical pricing study of the Property Claim Services data, where the parameters in the loss function distribution are estimated by the MLE method and the default probabilities are deduced by the US financial market data. Then we get the catastrophe bonds value by the Monte Carlo method.