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JDR Vol.10 No.6 pp. 1110-1116
(2015)
doi: 10.20965/jdr.2015.p1110

Paper:

Pricing Earthquake Catastrophe Options Based on the Mixed-Multinomial Tree Model

Feixing Wang and Xiaoling Gu

Schools of Mathematics and Physics, University of Science and Technology Beijing
No.30, Xueyuan Road, Haidian District, Beijing 100083, P.R. China

Received:
August 25, 2015
Accepted:
October 23, 2015
Published:
December 1, 2015
Keywords:
earthquake catastrophe option, mixed-multinomial tree model, earthquake intensity, earthquake loss ratio
Abstract

The discrete time model we propose for option pricing, called the mixed-multinomial tree model (MMTM), extends the conventional multinomial tree model by assuming that both the number of branches of node m and possible values ui are random variables during each period. The conventional multinomial tree model cannot be used to describe the accumulated loss process in earthquakes because earthquakes occur randomly and different main shocks may have different aftershocks. We therefore apply the MMTM to build an accumulated earthquake loss model in earthquake catastrophe options. We study option pricing for such a model and obtain a call option pricing formula.

Cite this article as:
F. Wang and X. Gu, “Pricing Earthquake Catastrophe Options Based on the Mixed-Multinomial Tree Model,” J. Disaster Res., Vol.10, No.6, pp. 1110-1116, 2015.
Data files:
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