Optimal Catastrophe Bond Design and its Applications to Climate Change Risk

Battle Count: 50

While primarily focused on insurance and actuarial science, the findings on CAT bond design are relevant for institutional investors and hedge funds involved in insurance-linked securities (ILS) markets. It informs the structuring of risk-transfer instruments but is less directly applicable to high-frequency or algorithmic trading strategies.

The theoretical framework involves advanced calculus of variations and risk measure theory. Numerical implementation requires fitting heavy-tailed distributions to censored data and solving non-linear equations for optimal attachment points, which requires specialized actuarial or quantitative finance expertise.

The paper provides detailed mathematical derivations, explicit formulas for optimal attachment points under various criteria, and uses publicly available NOAA data. However, specific code for the numerical implementation is not explicitly linked in the text provided.