The diffusion of complex securities: The case of CAT bonds

Jose Faias and José Guedes

Insurance: Mathematics and Economics, 2020, vol. 90, issue C, 46-57

Abstract: Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.

Keywords: Bayesian updating; Learning; Reinsurance; CAT bonds; Innovation (search for similar items in EconPapers)
JEL-codes: D40 G22 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:90:y:2020:i:c:p:46-57

DOI: 10.1016/j.insmatheco.2019.10.011

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