The Calculation of Optimal Interest Rate of Fire Insurance Catastrophe Bonds in Iran using Extreme Value Theory

Document Type : Research Paper

Authors

1 Financial M.S. K.N. Toosi University of Technology, Tehran, Iran

2 Assistant Professor K.N. Toosi University of Technology, Tehran, Iran

3 Ph.D. Economy of Mazandran University, Mazandaran, Iran

Abstract

In recent decades, issuing of Catastrophe Bonds for covering the catastrophe losses such as earthquakes, floods, etc. are getting more widespread. The purpose of this paper is determination of the optimal interest rates for investors of these securities, so that it becomes attractive for them. This paper uses fire insurance data in the period of 1328 to 1388 and considers the Peaks over Threshold (POT) for measuring the catastrophe bonds value at risk. The u threshold has been selected with using normal power approximation, and the difference between it and the VaR higher than this threshold has been considered as catastrophe bonds risk. Finally, the optimal rate for these bonds, with maturity of 3 years and in 1000 nominal value of the currency, is calculated to 21.52%.
 

Keywords

Financial Research Journal
Volume 14, Issue 1 - Serial Number 1
August 2013
Pages 101-116

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