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Catastrophe Futures and Reinsurance Contracts: An Incomplete Markets Approach

Journal of Futures Markets

44 Pages Posted: 9 Sep 2014 Last revised: 22 Sep 2017

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Ali Boloorforoosh

Concordia University; National Bank of Canada

Date Written: August 11, 2017

Abstract

We present a theoretical methodology based on stochastic dominance for the pricing of catastrophe (CAT) derivatives with non-convex payoffs given the price of a CAT indexed futures contract. We do not assume a fully diversifiable CAT event risk, nor do we assume knowledge of the martingale probability measure beyond the futures price. We derive tight bounds on the contract value and present trading strategies exploiting the mispricing whenever the value lies outside the bounds. We estimate numerically the bounds of the reinsurance contract with real data from hurricane landings in Florida.

Suggested Citation

Perrakis, Stylianos and Boloorforoosh, Ali, Catastrophe Futures and Reinsurance Contracts: An Incomplete Markets Approach (August 11, 2017). Journal of Futures Markets. Available at SSRN: https://ssrn.com/abstract=2493313 or http://dx.doi.org/10.2139/ssrn.2493313

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Ali Boloorforoosh (Contact Author)

Concordia University ( email )

John Molson School of Business
1455 de Maisonnuve Blvd. W
Montreal, Quebec H3G 1M8
Canada
5142965877 (Phone)

HOME PAGE: http://aliboloor.com

National Bank of Canada ( email )

1155 Metcalfe Street
Suite 1900
Montreal, Quebec H3B 4S9
Canada
(514) 390 7455 (Phone)

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