Robust indifference valuation of catastrophe bonds

Abstract

We study utility indifference pricing of a catastrophe (CAT) bond subject to CAT intensity and severity uncertainty for an uncertainty averse representative agent. Assuming the agent has an exponential utility function, we derive her robust ask and bid indifference prices of the CAT bond that are robust to adverse uncertain scenarios. We show that the agent's bid-ask spread increases with both her risk aversion and uncertainty aversion. Moreover, the CAT intensity and CAT severity distribution in the worst-case scenario depend on her trading position.