Climate Change Implications for the Catastrophe Bonds Market: An Empirical Analysis

26 Pages Posted: 27 Dec 2017 Last revised: 29 Apr 2019

See all articles by Claudio Morana

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Center for Economic Research on Pensions and Welfare Policies (CeRP); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Giacomo Sbrana

Neoma Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2019

Abstract

Since their introduction in the mid-1990s, the return per unit of risk or multiple on catastrophe (cat) bonds has steadily declined. This paper investigates whether this pattern is consistent with the historical evolution of natural disaster risk. Assessing the accuracy of cat bond pricing is important, since about 50% of outstanding risk capital in the cat bonds market is currently exposed to Atlantic hurricanes -a risk that climate change, among other disruptions, is expected to enhance- and pension and mutual funds in European and other OECD countries currently own about 30% of the market. In this respect, while our findings suggest that falling multiples are primarily related to the Fed's expansionary monetary stance and to portfolio shift effects, we do also find evidence of significant undervaluation of natural disaster risk in the cat bonds market. This finding, also in light of the unfailing appetite of institutional investors for such securities, casts doubts over the sanity of the market and over cat bonds as suitable investment products for risk averse investors.

Keywords: Catastrophe (cat) bonds and insurance-linked securities (ILS), multiples, global warming, climate change, El Niño Southern Oscillation, Atlantic hurricanes, semiparametric dynamic conditional correlation model.

JEL Classification: G11, G23, C32

Suggested Citation

Morana, Claudio and Sbrana, Giacomo, Climate Change Implications for the Catastrophe Bonds Market: An Empirical Analysis (March 1, 2019). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 377. Available at SSRN: https://ssrn.com/abstract=3092970

Claudio Morana (Contact Author)

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
Piazza dell'Ateneno Nuovo 1
Milano, 20126
Italy
+39 0264483091 (Phone)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

Moncalieri, Turin
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Giacomo Sbrana

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

Register to save articles to
your library

Register

Paper statistics

Downloads
87
Abstract Views
371
rank
244,493
PlumX Metrics