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A Bayesian Approach To Assessing The Risk Premium On Catastrophe Bond Derivatives At Issuance, Dickson K. Nkwantabisa
A Bayesian Approach To Assessing The Risk Premium On Catastrophe Bond Derivatives At Issuance, Dickson K. Nkwantabisa
Doctoral Dissertations (DBA)
Catastrophe (CAT) bond pricing is a challenging task due to the uncertainty inherent in the incomplete market setting in which they operate as such various pricing approaches have been proposed. In this paper, we offer an alternative Bayesian methodology which is a natural approach in the context of uncertainty. Our Bayesian model is highly flexible and can be implemented under different model assumptions without losing generalization. We develop an entire Bayesian framework to model the two fundamental sources of risks in CAT bond pricing – catastrophe and interest rate risks. Using a Hierarchical Dirichlet Process model (Teh et al., 2006), …