Single Earthquake Bond Pricing Framework with Double Trigger Parameters Based on Multi Regional Seismic Information

Abstract

The investor interest in multi-regional earthquake bonds may drop because high-risk locations are less appealing to investors than low-risk ones. Furthermore, a single parameter (earthquake magnitude) cannot accurately express the severity due to an earthquake. Therefore, the aim of this research is to propose valuing a framework for single earthquake bonds (SEB) using a double parameter trigger type, namely magnitude and depth of earthquakes, based on zone division according to seismic information. The zone division stage is divided into two stages. The first stage is to divide the covered area based on regional administrative boundaries and clustering based on the earthquake disaster risk index (EDRI), and the second stage involves clustering based on magnitude and depth of earthquakes and distance between earthquake events using the K-Means and K-Medoids algorithms. The distribution of double parameter triggers is modeled using the Archimedean copula. The result obtained is that the price of SEB based on the clustering result of EDRI categories and K-Means is higher than the price obtained by clustering EDRI categories and K-Medoids with maturities of less than 5 years. The result of this research is expected to assist the Special Purpose Vehicle in determining the price of SEB.

Catastrophe Bond Diversification Strategy Using Probabilistic–Possibilistic Bijective Transformation and Credibility Measures in Fuzzy Environment

“…However, the investor will receive the entire face value and the coupons if the triggering event does not occur until the maturity date. The triggers that can be used in a catastrophe bond include a single trigger using a loss [37][38][39][40][41][42], multiple triggers using the number of deaths and the losses from the disaster [10,43,44], a single-parametric trigger using the earthquake's magnitude [45,46], a hybrid trigger using the earthquake's magnitude and loss [47], and a double-parametric trigger using the depth and magnitude of the earthquake [13,48]. When triggering events occur, parametric triggers have an advantage over other triggers in terms of high transparency and quicker payment regulation.…”

“…Let the number of choices of catastrophe bonds to be diversified be n, where E(H ϑ ) and Var(H ϑ ) are formulated using Equations ( 11) and (12). The diversification strategy model on catastrophe bonds is formulated in Equation (13).…”

“…The bond pricing model used for the simulation was adopted from research by Zimbidis et al [45], a modified model from Anggraeni et al [13], where the coverage area is not decomposed and the face value payoff function is in binary form. As for each catastrophe bond pricing model formulated in Equations ( 16)-( 18), the assumption used is that the trigger distribution model for Equation ( 16) is the GEV, that for Equation ( 17) is the GPD, those for Equation (18) are the Archimedean copula and GP, and the interest rate is fixed.…”

“…If the triggering event occurs before maturity, the investor will lose all or part of the face value and coupons. However, if no triggering event occurs, the catastrophe bond investors will get the entire face value and coupon at maturity [9][10][11][12][13]. The catastrophe bond payoff function can be formulated in a binary or piecewise linear function.…”

“…If the triggering event occurs before maturity, the holder of the catastrophe bond will lose all or part of the face value and coupon. However, if no triggering event occurs, the catastrophe bond holder will receive the entire face value and coupon at maturity [9][10][11][12][13].…”