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A Consumption-based Evaluation of the Cat Bond Market

Advances in Pacific Basin Business, Economics and Finance

ISBN: 978-1-78973-286-3, eISBN: 978-1-78973-285-6

ISSN: 2514-4650

Publication date: 21 August 2019

Abstract

I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that catastrophes are rare economic shocks that could bring investors closer to their subsistence level. The calibration requires shocks with an impact between −1% and −3% to explain a reasonable level of cat bond spreads. Such investor preferences are not only able to generate realistic cat bond returns and price comovement among different perils, but may also able to explain why cat bonds offer higher rewards compared to equally rated corporate bonds.

Keywords

Citation

Dieckmann, S. (2019), "A Consumption-based Evaluation of the Cat Bond Market", Advances in Pacific Basin Business, Economics and Finance (Advances in Pacific Basin Business, Economics and Finance, Vol. 7), Emerald Publishing Limited, Bingley, pp. 1-26. https://doi.org/10.1108/S2514-465020190000007002

Publisher

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Emerald Publishing Limited

Copyright © 2019 Emerald Publishing Limited