Catastrophe bonds as innovations in an agent-based CAPM



Su, F
(2018) Catastrophe bonds as innovations in an agent-based CAPM. Doctor of Philosophy thesis, University of Liverpool.

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Abstract

This thesis studies the effect of catastrophe (CAT) bonds as innovations in a financial market. It provides a new and alternative approach to the description of CAT bonds, by utilizing an agent-based CAPM to analyse the behaviour of CAT bonds in a financial-market setting that comprises key features of an insurance industry. First, a model of CAT bonds as new assets in the single-period CAPM is developed. In this model, a CAT bond price is determined by a market clearing condition. The effects of CAT bonds on the financial market are discussed. Conditions under which investors include new assets in their portfolios to increase utility are established. The premium and coupon of a CAT bond are determined, which provides an equilibrium theoretical foundation of the premium calculation principle from actuarial science. The notion of transferable insurance risk is developed and conditions for the transferability of catastrophe risk from the insurance industry to the financial market by means of CAT bonds are established. In a second step, CAT bonds are introduced in an agent-based multi-period CAPM with investors holding heterogeneous beliefs regarding future payoffs of assets. The minimum premium and coupon are determined. The notion of transferable risk is adapted to an agent-based framework. The concept of perceived Pareto superiority is introduced. Stochastic difference equations are derived to describe the co-evolution of asset and CAT bond prices. The changes in the market price of risk are analysed. The concept of a perfect forecasting rule is generalized to CAT bonds. Finally, a compound Poisson process that describes the evolution of insurance losses related to catastrophe risk is introduced. The loss that CAT bonds cover at each time period is simulated and discussed according to two different scenarios. By applying the loss process, the effects of CAT bonds on the financial market are simulated in terms of investors' behaviour and market risk.

Item Type: Thesis (Doctor of Philosophy)
Additional Information: email address: feisu.brave@gmail.com
Divisions: Faculty of Humanities and Social Sciences > Faculty of Humanities and Social Sciences
Depositing User: Symplectic Admin
Date Deposited: 09 Aug 2018 11:00
Last Modified: 12 Mar 2021 08:00
DOI: 10.17638/03022860
Supervisors:
  • Wenzelburger, Jan
  • Michael, Beer
  • Brendan, McCabe
URI: https://livrepository.liverpool.ac.uk/id/eprint/3022860