Catastrophe Bond Pricing In The Primary Market: The Issuer Effect And Pricing Factors

Abstract

The COVID pandemic has highlighted the importance of hedging against catastrophic events, for which the catastrophe bond market plays a critical role. Our paper develops a two-level modelling and uses a unique, hand-collected dataset, which is one of the largest and most detailed datasets to date containing: 101 different issuers, 794 different bonds, spanning from 1997-2020, to identify issuer effects robustly, isolating them from bond specific pricing effects, therefore providing more credible pricing factor results. We find that bond pricing and volatility are heavily impacted by the issuer, causing 26% of total price variation. We also identify specific issuer characteristics significantly impact bond pricing and volatility, and can account for upto 36% of total price variation. We further find that issuer effects are significant over different market cycles and time periods, causing substantial price variation. The size and content of our data also enables us to identify the counter-intuitive relation between bond premiums and maturity, and bond premiums and hybrid bond triggers.

Keywords: Catastrophe risk bonds; primary market; multilevel modelling; issuer effect; hedging

JEL Classification: G12; G14; G22; C32