Estimation of the Catastrophe Bonds Price by using Risk Neutral Measurement

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.