Tail Estimation and Catastrophe Security Pricing: Can We Tell What Target We Hit if We are Shooting in the Dark?

The past few years have seen the development and growth of traded securities with payoffs tied to natural and industrial disasters. Pricing the insurance features imbedded in these securities is difficult and imprecise. This lack of pricing precision translates to greater required return premiums to holders of these securities. This paper explores the nature of pricing uncertainty for a number of datasets, security designs, and loss distributions using both jackknife and bootstrap techniques. The economic impact of pricing uncertainty is then briefly explored given comparisons of prices from secondary market trading to more common issues with similar risk characteristics and predictions from theoretical models.