Epidemic Financing Facilities: Pandemic Bonds and Endemic Swaps

38 Pages Posted: 14 Jun 2021

See all articles by Shimeng Huang

Shimeng Huang

University of Wisconsin-Madison

Ken Seng Tan

University of Waterloo

Jinggong Zhang

Nanyang Business School, Nanyang Technological University

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Date Written: June 2, 2021

Abstract

While the COVID-19 pandemic has shattered the world with severe human toll and catastrophic economic losses and sufferings, it has also heightened the need for more effective solutions for managing epidemic-related risks. In this paper, we pro- pose two capital market-based epidemic financing facilities to address two extremes of epidemic risks. The proposed pandemic bond is meant to hedge the severe pandemic outbreak while the proposed endemic swap can be used to hedge a recurrent endemic. Using coronavirus as an example of a pandemic and dengue fever as an example of an endemic, we discuss the modeling and pricing of the proposed epidemic securities. We price the proposed securities based on epidemiological models as well as actuarial models. We show that the proposed hedging securities can provide additional capital relief for pandemic recovery plans, effectively stablize hedgers’ cash flows, and create attractive returns to different investors.

Keywords: Securitization, Pandemic bond, Endemic swap, Coronavirus, Dengue

JEL Classification: G19, G22, G32, H12

Suggested Citation

Huang, Shimeng and Tan, Ken Seng and Zhang, Jinggong and Zhu, Wenjun, Epidemic Financing Facilities: Pandemic Bonds and Endemic Swaps (June 2, 2021). Available at SSRN: https://ssrn.com/abstract=3859088 or http://dx.doi.org/10.2139/ssrn.3859088

Shimeng Huang

University of Wisconsin-Madison ( email )

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Jinggong Zhang

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Wenjun Zhu (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

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