Pricing dynamics in the market for catastrophe bonds

Peter Carayannopoulos, Olga Kanj and M. Fabricio Perez ()
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Peter Carayannopoulos: Wilfrid Laurier University
Olga Kanj: Wilfrid Laurier University

The Geneva Papers on Risk and Insurance - Issues and Practice, 2022, vol. 47, issue 1, No 8, 172-202

Abstract: Abstract We study the time variation of the market price of catastrophe (CAT) bonds for the period 1999–2016. While we find an overall decreasing trend in the price of expected loss risk, large catastrophes increase this price by 34% on average. Our empirical tests show that the latter effect is temporary and unlikely to be the byproduct of behavioural changes in investors’ perceptions about catastrophic risk, as previously argued. Instead, we find evidence that changes in the price of expected loss risk may be explained by changes in investor effective risk aversion, initiated by catastrophic events triggering CAT bond losses that could bring investors closer to their habit consumption levels and lead to a hard reinsurance market environment. Contagion effects from reinsurance markets are more relevant after main catastrophes given the levels of liquidity in the markets. Furthermore, contagion effects from financial markets are minor and only relevant during the subprime financial crisis, as documented in previous studies.

Keywords: Catastrophe bonds; Expected loss risk; External habit; Effective risk aversion; Insurance-linked security; Natural disasters (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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DOI: 10.1057/s41288-020-00194-3

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