Pricing Model Construction and Empirical Research on Catastrophe Bond Pricing for Three Major Crops in China

Abstract

Agricultural disaster risks are significant for the sector's development, and existing risk management tools have limitations.This paper introduces a nationwide catastrophe bond for wheat, maize, and rice , offering broad coverage for China's agriculture. The paper utilizes marginal distribution and Copula function fitting to model the disaster losses of the three major crops from 1990 to 2022. It employs Monte Carlo simulation to generate a 10,000-year event set and rank correlation to align simulated data with real data. The bond price is then calculated using the Wang model, addressing the challenge of data scarcity and providing an innovative approach to catastrophe bond design. The study finds that bond prices increase with the coverage period and risk level, with interest-risk bonds offering higher returns and risks than principal-and-interest risk bonds. Catastrophe bonds present a more stable risk diversification method compared to reinsurance, both in terms of returns and potential losses.To further the development of agricultural catastrophe bonds, the paper recommends optimizing the issuance environment and establishing a robust market infrastructure.