재무연구 제 권 호 (2012년 9월)
Asian Review of Financial Research, Vol., No..
pp.896~929
pp.896~929
Valuation of Insurers' Contingent Capital with Counterparty Risk and Price Endogeneity
Jin-Ping Lee Department of Finance, Feng Chia University, Taichung, Taiwan.
Chien-Ling Lo Department of Finance, National Taiwan University,
Min-Teh Yu Professor of Finance, National Taiwan University and Research Fellow at NCCU-RIRC, Taipei 10673, Taiwan.
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 - catastro- phe equity put option (CatEPut) - indicate that prices can easily be overestimated by 110 basis points without considering CR and be underestimated by 17{34 basis points without considering PE. This study also examines how CatEPuts aect the buyer's probability of default (PD). Our results show that buying CatEPut lowers the buyer's PD; however, if we ignore the new equity eect due to share issuance, the result is not true in some scenarios. Without taking CR and PE into account, one may signicantly overestimate the credit enhancement provided by the CatEPuts.
Jin-Ping Lee
Chien-Ling Lo
Min-Teh Yu
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 - catastro- phe equity put option (CatEPut) - indicate that prices can easily be overestimated by 110 basis points without considering CR and be underestimated by 17{34 basis points without considering PE. This study also examines how CatEPuts aect the buyer's probability of default (PD). Our results show that buying CatEPut lowers the buyer's PD; however, if we ignore the new equity eect due to share issuance, the result is not true in some scenarios. Without taking CR and PE into account, one may signicantly overestimate the credit enhancement provided by the CatEPuts.
