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Determination of Expected Return Rate of Catastrophe Securities Using Extreme Value Theory
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Mostafa Gorgani Firouzjah *   , Ali Peyravi |
| , mostafa.gorgani.mfe@gmail.com |
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Abstract: (9387 Views) |
| One of the most effective tools for risk coverage in catastrophic events which widely used in the world is Catastrophe bonds. The purpose of this paper is to determine the optimal expected rate of return for investors of these securities, so that they become attractive for them. This paper uses fire insurance data during 1949-2009, and then applies the Peaks over Threshold (POT) method for measuring the catastrophe bonds value at risk. The u threshold has been selected with using normal power approximation, and the difference between it and the VAR higher than this threshold has been considered as catastrophe bonds risk. Then, considering the alternative investment opportunities such as the Tehran stock exchange and gold and real estate market, using the Sharpe ratio we determine the these securities optimal expected rate of return. Each of these investment opportunities risk is calculated based on the multivariate GARCH model. The results show that the expected rate of return on these bonds must be at least 29.32%. |
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| Keywords: Catastrophe Securities, Multivariate GARCH, Extreme Value Theory, Generalized Pareto Distribution, Bootstrap Simulation |
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Full-Text [PDF 851 kb]
(4316 Downloads)
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Type of Study: Applicable |
Subject:
General
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