Valuation of double trigger catastrophe options with counterparty risk

I. Ming Jiang; Sheng Yung Yang; Yu Hong Liu; Alan T. Wang

doi:10.1016/j.najef.2012.06.017

Valuation of double trigger catastrophe options with counterparty risk

I. Ming Jiang, Sheng Yung Yang, Yu Hong Liu, Alan T. Wang

Research output: Contribution to journal › Article › peer-review

16 Citations (Scopus)

Abstract

This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.

Original language	English
Pages (from-to)	226-242
Number of pages	17
Journal	North American Journal of Economics and Finance
Volume	25
DOIs	https://doi.org/10.1016/j.najef.2012.06.017
Publication status	Published - 2013 Aug

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/j.najef.2012.06.017

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title = "Valuation of double trigger catastrophe options with counterparty risk",

abstract = "This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.",

author = "Jiang, {I. Ming} and Yang, {Sheng Yung} and Liu, {Yu Hong} and Wang, {Alan T.}",

note = "Funding Information: We are grateful to the guest editors, Shawkat Hammoudeh and Michael McAleer, and the anonymous referees for detailed comments which have materially improved this paper. We also thank the participants in 16th International Conference on Computing in Economics and Finance for the valuable comments and the National Science Council, Taiwan, R.O.C. , for the financial support (grant No. NSC98-2410-H-006-022 and No. NSC99-2914-I-155-011-A1 ). Copyright: Copyright 2013 Elsevier B.V., All rights reserved.",

year = "2013",

month = aug,

doi = "10.1016/j.najef.2012.06.017",

language = "English",

volume = "25",

pages = "226--242",

journal = "North American Journal of Economics and Finance",

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AU - Jiang, I. Ming

AU - Yang, Sheng Yung

AU - Liu, Yu Hong

AU - Wang, Alan T.

N1 - Funding Information: We are grateful to the guest editors, Shawkat Hammoudeh and Michael McAleer, and the anonymous referees for detailed comments which have materially improved this paper. We also thank the participants in 16th International Conference on Computing in Economics and Finance for the valuable comments and the National Science Council, Taiwan, R.O.C. , for the financial support (grant No. NSC98-2410-H-006-022 and No. NSC99-2914-I-155-011-A1 ). Copyright: Copyright 2013 Elsevier B.V., All rights reserved.

PY - 2013/8

Y1 - 2013/8

N2 - This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.

AB - This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.

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JO - North American Journal of Economics and Finance

JF - North American Journal of Economics and Finance

ER -

Valuation of double trigger catastrophe options with counterparty risk

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