The Diffusion of Complex Securities: The Case of CAT bonds

41 Pages Posted: 8 Jan 2016 Last revised: 18 Jun 2017

See all articles by José Afonso Faias

José Afonso Faias

Catholic University of Portugal (UCP)

Jose Correa Guedes

Catholic University of Portugal (UCP)

Date Written: January 1, 2017

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 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

Faias, José and Guedes, Jose Correa, The Diffusion of Complex Securities: The Case of CAT bonds (January 1, 2017). Available at SSRN: https://ssrn.com/abstract=2712014 or http://dx.doi.org/10.2139/ssrn.2712014

José Faias

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

Jose Correa Guedes (Contact Author)

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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