Abstracts Economics

Catastrophe bond spread pricing in the primary market based on multifactorial models : new evidence

by Gomes Santos Pedro

The prevailing volatility of the price/spread related to catastrophe risk around this newly innovative type of instrument, called CAT bond, gave light to this literature. Contrarily to normal type of insurance coverage risks (such as cars, houses, etc...) risk associated to natural and human catastrophes is more unpredictable and costly for (re)insurance companies. Insurance and reinsurance companies found a way to finance this expensive risk by shifting it to investors through Insurance-Linked Securities (ILS), more precisely and successfully, CAT bonds. By cross-checking data and information from multitude of sources, I investigated which are the main determinants capable to influence the price, spread or coupon of a catastrophe bond on the primary market for those instruments. This paper gathers data of 284 catastrophe bonds issued in the market between January 2013 and October 2021 provided by Artemis deal directory. My research contains an introduction part on those innovative type of bonds, an overview on previous research regarding the question and their results, and some empirical data on the main goal of this work, which is defining what variables influence the price of the CAT bond in the primary market. OLS regressions techniques with heteroskedasticity and autocorrelation consistent standard errors are mainly used based on multifactor based models in order to identify the main determinants of the price. The work of Alexander Braun will be the main inspiration for this work, I will apply a couple of same techniques on my work, according to the data available and Stata limitations. The outcome of the larger model including the whole set of variables and crossed variables shows that the expected loss is the major influencers of the catastrophe risk prices for both the in-sample and out-of-sample estimation and across diversified subsamples and models. As per the conclusion from previous researchers, the expected loss variable has shown to impact positively the price of the coupon bond much more than any other variable.