On the Extraction of Cyber Risks using Structured Products

36 Pages Posted: 15 Jan 2020

Date Written: December 26, 2019

Abstract

The aim of this paper is to develop an approach to extract information about cyber risks from structured financial products. We consider decision makers that are interested in extracting information about the uncertainty of Cyber risks. The value of information can be evaluated using recently developed entropy approaches in Finance. The underlying idea is that what we call Arrow-Debreu Cyber Risk state prices can be extracted provided the right structured products be “created”. It is shown that different market based approaches can be used to get a better idea of the shape of the loss distribution facing firms. This information is potentially of interest to evaluate the risk premiums of insurance products. Comparisons between extracted market expectations can also be informative for risk evaluation, notably the distribution of unexpected losses and the eventual shortfall calculations. Finally, recent information-theoretic approaches enable us to make the link between pricing and the value of information to investors.

Keywords: Cyber Risk, Information theory, Pricing

JEL Classification: G, Z

Suggested Citation

Verlaine, Michel, On the Extraction of Cyber Risks using Structured Products (December 26, 2019). Available at SSRN: https://ssrn.com/abstract=3509741 or http://dx.doi.org/10.2139/ssrn.3509741

Michel Verlaine (Contact Author)

ICN Business School ( email )

13 rue du Marechal Ney
Nancy, 54000
France

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