Common Risk Factors in the Cross Section of Catastrophe Bond Returns

55 Pages Posted: 12 Aug 2021 Last revised: 6 Jul 2022

See all articles by Alexander Braun

Alexander Braun

Institute of Insurance Economics (University of St. Gallen); Swiss Finance Institute

Markus Herrmann

University of Duisburg-Essen - Mercator School of Management

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Date Written: July 4, 2022

Abstract

Catastrophe bonds are an alternative investment with high excess returns and low correlations to other asset classes, for which no factor pricing model has emerged to date. We analyze the cross section of catastrophe bond returns for the complete market between 2001 and 2020. Our empirical results show that, of all known coupon and yield spread determinants, only (seasonal) event risk significantly impacts realized returns. A novel three-factor model based on these insights explains more than 80% of the historical excess return variation in the cat bond market and eliminates the alpha left by classical benchmarks.

Keywords: Catastrophe Bonds, Asset Pricing, Factor Model

JEL Classification: C12, G01, G11, G12, G17

Suggested Citation

Braun, Alexander and Herrmann, Markus and Hibbeln, Martin Thomas, Common Risk Factors in the Cross Section of Catastrophe Bond Returns (July 4, 2022). Available at SSRN: https://ssrn.com/abstract=3901695 or http://dx.doi.org/10.2139/ssrn.3901695

Alexander Braun (Contact Author)

Institute of Insurance Economics (University of St. Gallen) ( email )

Tannenstrasse 19
St. Gallen, 9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://https://www.alexandria.unisg.ch/persons/2621

Markus Herrmann

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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