A Characterization of CAT Bond Performance Indices

13 Pages Posted: 27 Mar 2018

See all articles by Denis-Alexandre Trottier

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students

Van Son Lai

Université Laval

Frédéric Godin

Concordia University, Quebec - Department of Mathematics & Statistics; Université Laval

Date Written: March 21, 2018

Abstract

Although several works have highlighted the diversification benefits of catastrophe (CAT) bond funds as well as the attracting returns they offer, there is a lack in the literature regarding what econometric models are suitable to predict the risks of such funds. This note contributes by offering such a statistical description of the dynamics of CAT bond indices total returns series. The approach is based on a regime-switching model that parsimoniously accounts for the leptokurtosis, skewness, and autocorrelation of returns, as well as for (G)ARCH effects, seasonality, and the sudden impact of natural disasters. Estimation and specification testing is carried out for four weekly indices tracking the performance of different CAT bond sectors; this allows identifying several salient stylized features for the returns dynamics of this asset class.

Keywords: Catastrophe bonds, CAT bond Swiss Re indices, Regime-switching GARCH models

Suggested Citation

Trottier, Denis-Alexandre and Lai, Van Son and Godin, Frédéric, A Characterization of CAT Bond Performance Indices (March 21, 2018). Available at SSRN: https://ssrn.com/abstract=3146055 or http://dx.doi.org/10.2139/ssrn.3146055

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students ( email )

Pavillon Palasis-Prince
Quebec, Quebec G1K 7P4
Canada

Van Son Lai (Contact Author)

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Frédéric Godin

Concordia University, Quebec - Department of Mathematics & Statistics ( email )

1455 De Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada

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