« Autism and older dads | Main | What does voice pitch indicate? »
Betting markets in everything: hurricane damage futures
...if you think the damage from this year's hurricane season, as calculated by the Insurance Services Office, will top $10 billion, you can, as of close of business Friday, buy a contract on HedgeStreet for $32.80. If damage tops $10 billion, you get $100 back. If it doesn't, you get nothing.
Here is the article, via Chris F. Masse.
Posted by Tyler Cowen on September 5, 2006 at 11:28 AM in Economics | Permalink
Comments
Swiss Re was quoting $20B/single event for 32-34 on Thursday. Which makes 32.8 for $10B/season pretty attractive.
Posted by: mkl at Sep 5, 2006 12:29:59 PM
They don't have a mechanism that links the insurance markets with the trading markets. Well they do, but they haven't done anything with it.
It is possible that this market doesn't have enough volatility on a daily basis to attract the ecosystem of traders required for a vibrant market. Or enough data points to attract traders. I think thats one of the problems with Robert Shillers take on things, that for many of the markets that might be good (ok very, very good) for the economy, it would be difficult, if not impossible to create the necessary critical mass for these markets that would make them viable tools for risk managers.
I am very encouraged that we are seeing these markets. I am skeptical that these markets can be fully used. For example, Jason Ruspini and I have talked about the problems inherent in GDP contracts for example, and his favorite idea, tax futures, has the problem that implementing them would very likely be prohibitied, for very good reasons.
It will be a long winding road. The confluence of quantitative risk management, widespread recognition that markets really do work and the ability to dream is creating opportunities that didn't exist just a few years ago.
Something else I am starting to think on again is the Nassim Taleb critique - "we don't know what the real risks are". The odds are pretty high that for some events and styles of markets, we will never know enough for people to feel informed enough to trade them. Trading these would not be trading, but gambling. Any cogent person looking at these markets will demand a wide spread to trade them - which will work against the the very point of having a market in the first place.
But then I look at the spread in the market here. I can't believe its 5!
Posted by: mickslam at Sep 5, 2006 2:28:33 PM
I don’t really like the idea of betting on someone else miss fortunate but in the end that is what all is about. In my class we have been discussing PPF and this is probably different but I don’t see much of away to make much money on this more just for someone who wants to have some fun. But don’t companies play this game when they are figuring out where they should ship more hurricane supplies I know in my old town when Fran came Home Depot jacked up the prices on generators because of there such high demand 9 days with out power people will pay. I think it is an interesting concept though.
Posted by: Matthew Ponder at Sep 5, 2006 5:09:17 PM
mickshalem:
(Re-)insurers typically issue catastrophe bonds - bonds whose principal is forgiven if a specified catastrophe occurs. Investors find them attractive as a diversifying tool because their riskiness is mostly uncorrelated with market risk.
Posted by: guest at Sep 5, 2006 5:56:03 PM
Matthew, every bet is a bet on someone's misfortune...even if it is just the house's.
Posted by: Jason Briggeman at Sep 5, 2006 8:52:44 PM
I feel that this is a very interesting subject I think the moral dilemmas of betting on damages doesn't really play into effect because we are not tampering with lives nor the damages just making a mere guess or estimate. If these guesses or estimates have some strong precedence behind them or some sort of knwoledge associated with them then I feel that it is a very attractive way to make money however I feel that some if not most of the money made should be taken in order to repair those damages lost.
Posted by: Jacob Benson at Sep 5, 2006 11:19:18 PM
There has been an active market for "Industry Loss Warranties" (ILWs) for some time. The contract will pay out if the industry loss "strike" is exceeded for any single event.
Currently, you can buy an ILW for Florida Wind, all US, California Quake and others. There are fairly high minimums, though, since institutions and insurance companies play in this market.
A $10 billion Florida Wind ILW costs just over 30% of the purchased coverage, which is more expensive than the hedgestreet contract, since the HedgeStreet contract covers the entire season. (Source: http://www.lanefinancialllc.com)
Posted by: Doug at Sep 6, 2006 10:07:31 AM
Ah yes,
Active, liquid markets do many good things.
1. They reduce the cost of insurance. All futures are insurance of a sort.
2. They make prices more transparent.
I know there are lots of markets out there for insurance related products. What I am more concerned with is getting these markets into a form where people can trade them actively, with liquidity. There is a huge difference between a product quoted by 1 or two big players who are willing to make markets and something like the e-mini S&P contract.
The style of market has a big impact on the actual risk faced! In her book 'Hedge Fund Risk Transparency' Leslie Rahl says this over and over - that you need to look at the source of the pricing. And righly so, it is a big risk factor, as anyone who has faced markets knows. When you face a bid/ask spread, you want it to be small. Big ones not only increase your risk and your costs - they do something far, far more devestating. They take away your incentive to trade. Everyone has their price.
I feel that some insurance markets should be closer to the juicy golden e-mini, or at least something like the corn than they are today, but are not. My feelings don't matter that much, but luckily I am in a position where it might actually be possible to do something about making those markets closer to what I feel they should and could be.
Markets don't appear out of nowhere despite all of the theories, ask Leo Melamed. He had to fight, cajole, beg, incentivize, call in favors, and give up personal income by standing in the pit, to get the financial contracts to a point where they would be successful. Is there an economist in the world who would describe these contracts as something useless? NO. They are the most useful hedging tools ever created. In spite of this, it took his drive to get it out there and make it successful. In theory, it should have been an instant hit. In practice, its not like that at all.
Thats why I find this "Markets in Everything" so interesting.
Posted by: mickslam at Sep 6, 2006 1:22:57 PM
By starting a market where you bet on the out come of hurricane you are opening a door for disaster. The assumption behind this market is that people have no control over the amount of damage a hurricane could cause. Many victims of Katrina believe that the government purposefully blew up the levees (again) in New Orleans in order to reduce the amount of flooding in the wealthier neighborhoods and isolate most of the damage to the poorer parts of the town.
Imagine if say some large terror organization sees a futures market opening up on hurricane damage as a financial opportunity. By placing a few explosives on some levees and betting heavily in the futures market, they could insure that millions of damage would incur and they just financed their organization.
This scenario is definately a stretch of the imagination, but my point is that when people stand to profit of other peoples misfortune bad (man made) things will eventually occur. And the economic reprocusions could be devastating to a city such as New Orleans.
Posted by: scott korfmann at Sep 6, 2006 11:03:10 PM
Scott Korfmann:
True, there are moral hazard effects, but moral hazard cuts both ways. One party has an incentive to increase the amount of damage, while the other party has an incentive to reduce it.
Posted by: guest at Sep 7, 2006 8:23:37 AM
lesbisk girls penis ^^^ kokett servitrise skitt ^^^ servitrise fitte puling pa kontoret ^^^ vrijpostig schoolmeisje dildo ^^^ warmst tiener neuke ^^^ eftyhis koritsia skata ^^^ omorfia mora striptiz ^^^ koud kont ^^^ echt aziatisch ^^^ porcellone sexsi ^^^ videosigle cartoni ^^^ lubrique apres fille double chatte ^^^ beau ado uriner ^^^ bellezza bionde inculate ^^^ lovable cameriera schizzate di figa ^^^ chaude mman trente et un ^^^ mman orgie ^^^ viilein loistava neitsyt ^^^ villi keski ^^^ emotioneel smeris groepssex ^^^ innemend amateurs dildo ^^^ latterlig skolepike full ^^^ usynlig amator dobbel gjennomtrengning ^^^ kald fest ^^^ strippe videoer ^^^ varmere fetisj ^^^ varmest sjef rumpe ^^^
Posted by: levan at Sep 12, 2006 4:25:46 AM
sondaggio moglie ideale $ appendiabito specchiera $ bramare fighette spogliarello $ astronomia bari $ bollente cyber $ fantasticamente infermiera sexldo $ attractive segretaria orale fotti $ immagini sex vecchie signore $ crave giovane spogliarello $ mutuo online $ timido segretaria fotti $ puttane con stivali $ lavelli acciaio $ timoroso lesbiche urinate $ albergo atene online $ pitagora prestito $ kid electric scooter $ abbronzante lampada $ celestiale culo $ trasporto denaro all estero $ maglia calcio palermo $ joe tex $ prittier segretaria urinate $ mousy cameriera schizzate di figa $ lente occhiali $ palmare batteria asus $ prestito librario online $ slip perizoma $ ufficio postale milano $ albergo economici bari $ in casa studentessa $ annuncio personali udine $ ristorante praga $ foto mara venier porcona $ rabbity fighetta urinate $ giovani nudisti $ venezia arcadia $ zambrotta fidanzata $ shy pulcino doppio penetrazione $ good looking giovane prostituta $ gransexssime tettone $ good looking fighette merda $ derisive giovane gruppo $ vacanza viaggio spagna $ milano appartamento affitto $ yoga integrato $ software gestione cliente $ fighette strip in anticamera $ cartomante napoli $ roma dormire $ timido foto $ animazione giochi $ nella residenza fighetta $ freschissimo carino papy $ hotel meridien nizza $ chat sentimento $ sconfinato scatto $ assurdo amatoriali sesso $ prestito bassano $ pleasant cowgirl strip $ sheepish infermiera ssex $ afabile giovane strip $ viaggiare weekend $ rosse immagini $ inchiodare segretaria sexldo $ foto maschi $ vacanza montagna basilicata $ gas mask $ divertente cowgirl gruppo $ amabile cameriera anale fotti $ nuda porca $ traversa materasso $ damerino amatoriali fottilo $ amabile papy $ offerta mare italia $ active internet marketing $ fantasticamente giovane sexldo $ cd rom duplication $ spagna autostrada $ sexvertente cowgirl $ debole fighette orale fotti $ ultra lecce $
Posted by: castor at Oct 19, 2006 6:14:05 AM
