Trading and Liquidity in the Catastrophe Bond Market

40 Pages Posted: 2 Mar 2020 Last revised: 9 Nov 2020

See all articles by Markus Herrmann

Markus Herrmann

University of Duisburg-Essen - Mercator School of Management

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Date Written: February 1, 2020

Abstract

Based on a TRACE dataset of 9393 cat bond trades on the secondary OTC market from 2015 to 2019, we analyze trading patterns, liquidity determinants, and the liquidity premium of catastrophe bonds. We find that cat bonds are mostly traded without inventory involvement of dealers, and they are less frequently traded during the hurricane season. Based on 3341 dealer-buy and dealer-sell trade pairs from 229 cat bonds with exogenous default risk, we find that liquidity is high for bonds with low default risk, bonds close to maturity, and in periods of high trading activity in the overall market. Using bid-ask spreads as a liquidity measure, we find that 21% of the observable yield spread on the cat bond market is attributable to the liquidity premium, with an average liquidity premium of 98 bps, which even increases to 141 bps for high-risk bonds

Keywords: bonds, liquidity, yield spreads, alternative risk transfer

JEL Classification: G12, G22, G32

Suggested Citation

Herrmann, Markus and Hibbeln, Martin Thomas, Trading and Liquidity in the Catastrophe Bond Market (February 1, 2020). Available at SSRN: https://ssrn.com/abstract=3530048 or http://dx.doi.org/10.2139/ssrn.3530048

Markus Herrmann (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstra├če 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstra├če 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379-2830 (Phone)

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