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- Title
Average Rate Claims with Emphasis on Catastrophe Loss Options.
- Authors
Bakshi, Gurdip; Madan, Dilip
- Abstract
This article studies the valuation of options written on the average level of a Markov process. The general properties of such options are examined. We propose a closed-form characterization in which the option payoff is contingent on cumulative catastrophe losses. In our framework, the loss rate is a mean-reverting Markov process, with no continuous martingale component. The model supposes that high loss levels have lower arrival rates. We analytically derive the cumulative loss process and its characteristic function. The resulting option model is promising.
- Subjects
ASIA; MATHEMATICAL models of option; CONTINGENT valuation; MATHEMATICAL models of finance; DISASTER insurance; PETROLEUM transportation
- Publication
Journal of Financial & Quantitative Analysis, 2002, Vol 37, Issue 1, p93
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/3594996