Title:

Two-factor utility approach to valuation of catastrophe bonds

Subtitle:

Raport Badawczy = Research Report ; RB/59/2005

Creator:

Jakubowski, Andrzej

Publisher:

Instytut Badań Systemowych. Polska Akademia Nauk ; Systems Research Institute. Polish Academy of Sciences

Place of publishing:

Warszawa

Date issued/created:

2005

Description:

26 pages ; 21 cm ; Bibliography p. 22

Subject and Keywords:

Pricing procedure ; Two-factor utility ; Expected return ; Worst case return ; Risk aversion ; Subjective scale ; Safety level

Abstract:

In the paper, a new approach to valuation of bonds under the default risk conditions, based on the concept of the investors' two-factor utility function is proposed. The first factor describes the expected average return from the risky investments, while the second - the worst case return. As a class of risky securities the so-called catastrophe bonds are considered. It is assumed that depending on the structure of the security contract, the investor who buys the bond issued by a local authority governing the risky region - will lose his interest payments and/or the principal value, if a catastrophic event occurs. For the purpose of the valuation procedure, the new notions of the security safety level, the safety index, as welI as a two-rule decision model are successively introduced. The subjective scale as a measure of the degree of individuals' risk aversion is proposed. The idea of objective and subjective risk components is investigated. The methodology proposed is ilIustrated by a computational example.

Relation:

Raport Badawczy = Research Report

Resource type:

Text

Detailed Resource Type:

Report

Source:

RB-2005-59

Language:

eng

Language of abstract:

eng

Rights:

Creative Commons Attribution BY 4.0 license

Terms of use:

Copyright-protected material. [CC BY 4.0] May be used within the scope specified in Creative Commons Attribution BY 4.0 license, full text available at: ; -

Digitizing institution:

Systems Research Institute of the Polish Academy of Sciences

Original in:

Library of Systems Research Institute PAS

Projects co-financed by:

Operational Program Digital Poland, 2014-2020, Measure 2.3: Digital accessibility and usefulness of public sector information; funds from the European Regional Development Fund and national co-financing from the state budget.

Access:

Open