Catastrophe Bond Pricing with Fuzzy Volatility Parameters

Part of the Studies in Computational Intelligence book series (SCI, volume 530)


The number of natural catastrophes and losses caused by them increase in time. The damages caused by natural disasters are difficult to handle for insurers. Therefore catastrophe bonds were introduced to transfer the catastrophic risk to financial markets. In this paper we continue our research concerning catastrophe bond pricing. In our approach we use stochastic analysis and fuzzy sets theory in order to obtain catastrophe bond pricing formulas. To model the short interest rate we use the one- and two-factor Vasicek model. We take into account different sources of uncertainty, not only the stochastic one. In particular, we treat the volatility of the interest rate and market price of risk as fuzzy numbers. We use Monte Carlo simulations for data describing natural catastrophic events in the United States to illustrate the obtained results.


Catastrophe bonds Financial mathematics Fuzzy sets theory Monte Carlo simulations Vasicek model 


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© Springer International Publishing Switzerland 2014

Authors and Affiliations

  1. 1.Systems Research Institute Polish Academy of SciencesWarszawaPoland
  2. 2.The John Paul II Catholic University of LublinLublinPoland

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