Catastrophe bond pricing for the two-factor Vasicek interest rate model with automatized fuzzy decision making

Catastrophe bonds are financial instruments, which enable to transfer the natural catastrophe risk to financial markets. This paper is a continuation of our earlier research concerning catastrophe bond pricing. We assume the absence of arbitrage and neutral attitude of investors toward catastrophe risk. The interest rate behavior is described by the two-factor Vasicek model. To illustrate and analyze obtained results, we conduct Monte Carlo simulations, using parameters fitted for real data on natural catastrophes. Besides the crisp cat bond pricing formulas, we obtain their fuzzy counterparts, taking into account the uncertainty on the market. Moreover, we propose an automated approach for decision making in fuzzy environment with relevant examples presenting this method.

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