The Diffusion of Complex Securities: The Case of CAT bonds
41 Pages Posted: 8 Jan 2016 Last revised: 18 Jun 2017
Date Written: January 1, 2017
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 an innovative security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of this 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, Financial innovation, Reinsurance, CAT bonds
JEL Classification: G22, G28, D40
Suggested Citation: Suggested Citation