The Role of CAT Bonds in an International Multi-Asset Portfolio: Diversifier, Hedge, or Safe Haven?

Abstract

We examine whether CAT bonds can serve as a hedge or a safe haven for global stock, bond, real estate, commodity, private equity, and infrastructure markets. Our results indicate that CAT bonds are a poor hedge, but they act as an effective diversifier against all asset classes under investigation. Moreover, CAT bonds can serve as a strong safe haven against extreme price drops of stocks only during the post-crisis period.

Keywords: CAT Bonds, Alternative Investments, Diversifier, Hedge, Safe Haven, DCC GARCH

JEL Classification: G11, G15