Conventional wisdom states that catastrophe risk securities show no or little correlation with stock and bond markets, and offer significant attractions to investors providing a good diversification of risks. This study examines the correlation between catastrophe risk securities and portfolios of other equities by analyzing catastrophe effects on the Japanese stock market.
Using catastrophe data from SwissRe Sigma publications and stock returns from the Pacific‐Basin Capital Markets database, this paper analyzes stock and abnormal returns in the Japanese stock market using event study methodology.
For the Japanese stock market as a whole, there is no significant catastrophe effect. The results indicate a significant negative correlation between catastrophe loss amount and the insurance industry's equity returns and abnormal returns, a significant positive correlation with the construction industry, but no significant correlation with the real estate industry. This paper also analyzes the impact of catastrophe causalities. The results show little evidence on the significance of these variables.
This study provides important insights to the insurance/reinsurance industry in the Japanese risk market for catastrophe property and mortality risk securitization and to investors who are interested in further improvement of their portfolio risk/return profile by including catastrophe risk securities.
Yang, C.C., Wang, M. and Chen, X. (2008), "Catastrophe effects on stock markets and catastrophe risk securitization", Journal of Risk Finance, Vol. 9 No. 3, pp. 232-243. https://doi.org/10.1108/15265940810875568
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