Title: Valuation of insurers' contingent capital with counterparty risk and price endogeneity
Authors: Lo, Chien-Ling
Lee, Jin-Ping
Yu, Min-Teh
資訊管理與財務金融系 註:原資管所+財金所
Department of Information Management and Finance
Keywords: Contingent capital;Catastrophe risk;Insurer's default risk;Catastrophe equity puts;Contingent claim analysis
Issue Date: 1-Dec-2013
Abstract: This study develops a structural framework to value insurers' contingent capital with counterparty risk (CR) and overcomes the problem of price endogeneity (PE) in the valuation model. Our results on the focal contingent capital instrument - catastrophe equity put option (CatEPut) - indicate that prices can be significantly overestimated without considering CR and be significantly underestimated without considering PE. This study also examines how CatEPuts affect the buyer's probability of default (PD). Our results show that buying a CatEPut lowers the PD for high-risk insurers, but not necessarily so for low-risk insurers; however, without taking CR and PE into account, one may significantly overestimate the credit enhancement provided by the CatEPuts. (C) 2013 Elsevier B.V. All rights reserved.
URI: http://dx.doi.org/10.1016/j.jbankfin.2013.09.007
ISSN: 0378-4266
DOI: 10.1016/j.jbankfin.2013.09.007
Volume: 37
Issue: 12
Begin Page: 5025
End Page: 5035
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