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EconoQuantum
On-line version ISSN 2007-9869Print version ISSN 1870-6622
Abstract
GAVIRA-DURON, Nora; CRUZ-AKE, Salvador and VENEGAS-MARTINEZ, Francisco. Determination of the required economic capital to hedge the risk of natural disasters in Veracruz, Mexico: An Archimedean copula approach. EconoQuantum [online]. 2018, vol.15, n.1, pp.7-29. ISSN 2007-9869. https://doi.org/10.18381/eq.v15i1.7110.
Climate change and various weather phenomena have caused major disasters in Mexico, mainly in those states and municipalities that are vulnerable to these phenomena. This paper develops a stochastic model for pricing a weather derivative, in which it is assumed that the maximum and minimum temperatures and precipitation are the only variables that describe a hydro-meteorological disaster as flood, hurricane or cyclone in Poza Rica, Veracruz. This is done through simulations of elliptical copulas of normal type and Archimedean copulas of Gumbel type. An indicator of the vulnerability on the basis of the level of urbanization and population size is also developed. Finally, the minimum capital that Natural Disaster Fund (FONDEN) must maintain to cope with an event is determined. The results show that simulations from a normal copula with extreme values in the marginal distribution show the best fit.
Keywords : Copulas; rainfall; hydro-meteorological disaster; extreme values; C01; C02; C51; C53; Q54.