A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces
The national scale of catastrophic losses risk linked to state catastrophe bonds (SCB) is enormous. It can reduce investors’ interest in buying them because the capital required and the loss probability are also significant. To overcome this, the SCB can be made on a smaller regional scale, known as...
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| Format: | Article |
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MDPI AG
2023-09-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/11/18/3825 |
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| author | Sukono Herlina Napitupulu Riaman Riza Andrian Ibrahim Muhamad Deni Johansyah Rizki Apriva Hidayana |
| author_facet | Sukono Herlina Napitupulu Riaman Riza Andrian Ibrahim Muhamad Deni Johansyah Rizki Apriva Hidayana |
| author_sort | Sukono |
| collection | DOAJ |
| description | The national scale of catastrophic losses risk linked to state catastrophe bonds (SCB) is enormous. It can reduce investors’ interest in buying them because the capital required and the loss probability are also significant. To overcome this, the SCB can be made on a smaller regional scale, known as a regional catastrophe bond (RCB). Through RCBs, the catastrophic loss risk investors bear becomes smaller, which can increase investors’ interest in buying them. Unfortunately, RCB issuance faced a fundamental obstacle, where its complex pricing model needed further study. Therefore, this study aims to model it. The model uniquely involves the inflation rate modeled using the Fisher equation and the nonbinary scheme of coupon and redemption value payments modeled by a compound Poisson process. In addition, the model is applied to Indonesia’s catastrophe data, resulting in all provinces’ RCB price estimation and the effects of several variables on RCB price. This research can guide the RCB pricing process of the country’s regions. The estimated RCB prices can be used by Indonesia’s government if RCBs are to be issued one day. Finally, the effects of the inflation rate, catastrophe intensity, and geographical location on RCB prices can guide investors in selecting bond portfolios. |
| first_indexed | 2024-03-10T22:30:15Z |
| format | Article |
| id | doaj.art-a5c416ab4e7e4794b991fb0ac26f217f |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-03-10T22:30:15Z |
| publishDate | 2023-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-a5c416ab4e7e4794b991fb0ac26f217f2023-11-19T11:48:08ZengMDPI AGMathematics2227-73902023-09-011118382510.3390/math11183825A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s ProvincesSukono0Herlina Napitupulu1Riaman2Riza Andrian Ibrahim3Muhamad Deni Johansyah4Rizki Apriva Hidayana5Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaDepartment of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaDepartment of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaDoctoral Program of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaDepartment of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaMagister Program of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, IndonesiaThe national scale of catastrophic losses risk linked to state catastrophe bonds (SCB) is enormous. It can reduce investors’ interest in buying them because the capital required and the loss probability are also significant. To overcome this, the SCB can be made on a smaller regional scale, known as a regional catastrophe bond (RCB). Through RCBs, the catastrophic loss risk investors bear becomes smaller, which can increase investors’ interest in buying them. Unfortunately, RCB issuance faced a fundamental obstacle, where its complex pricing model needed further study. Therefore, this study aims to model it. The model uniquely involves the inflation rate modeled using the Fisher equation and the nonbinary scheme of coupon and redemption value payments modeled by a compound Poisson process. In addition, the model is applied to Indonesia’s catastrophe data, resulting in all provinces’ RCB price estimation and the effects of several variables on RCB price. This research can guide the RCB pricing process of the country’s regions. The estimated RCB prices can be used by Indonesia’s government if RCBs are to be issued one day. Finally, the effects of the inflation rate, catastrophe intensity, and geographical location on RCB prices can guide investors in selecting bond portfolios.https://www.mdpi.com/2227-7390/11/18/3825regional catastrophe bondpricinginflation ratenonbinary payment schemeapplicationIndonesia |
| spellingShingle | Sukono Herlina Napitupulu Riaman Riza Andrian Ibrahim Muhamad Deni Johansyah Rizki Apriva Hidayana A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces Mathematics regional catastrophe bond pricing inflation rate nonbinary payment scheme application Indonesia |
| title | A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces |
| title_full | A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces |
| title_fullStr | A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces |
| title_full_unstemmed | A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces |
| title_short | A Regional Catastrophe Bond Pricing Model and Its Application in Indonesia’s Provinces |
| title_sort | regional catastrophe bond pricing model and its application in indonesia s provinces |
| topic | regional catastrophe bond pricing inflation rate nonbinary payment scheme application Indonesia |
| url | https://www.mdpi.com/2227-7390/11/18/3825 |
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