Pricing Dynamics in the Market for Catastrophe Bonds

56 Pages Posted: 29 Jan 2018 Last revised: 19 Feb 2018

See all articles by Peter Carayannopoulos

Peter Carayannopoulos

Wilfrid Laurier University - School of Business & Economics

Olga Kanj

Wilfrid Laurier University - School of Business & Economics

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Date Written: February 15, 2018

Abstract

In this paper we study the time variation of the market price of Catastrophe bonds for the period 1999-2016. While we find an overall decreasing trend in the expected loss premium, large catastrophes increase the expected loss premium by an order of 20% on average. Our empirical tests show that the latter effect is temporary and unlikely to be caused by behavioral changes in investors’ perceptions about catastrophic risk as previously documented. Instead, we find evidence that the changes in expected loss premiums are explained by changes in investor effective risk aversion, initiated by investors reaching habit consumption levels when a catastrophic event triggers Cat bond losses. Contagion effects from the 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.

Keywords: Cat Bonds, Insurance, Habit, Catastrophe

Suggested Citation

Carayannopoulos, Peter and Kanj, Olga and Perez, Marcos Fabricio, Pricing Dynamics in the Market for Catastrophe Bonds (February 15, 2018). Available at SSRN: https://ssrn.com/abstract=3106496 or http://dx.doi.org/10.2139/ssrn.3106496

Peter Carayannopoulos

Wilfrid Laurier University - School of Business & Economics ( email )

80-University Avenue west
Waterloo, Ontario N2L 3C5
Canada

Olga Kanj

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Marcos Fabricio Perez (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

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