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

Chatoro, M, Mitra, S., Pantelous, A.A. and Shao, J. 2023. Catastrophe Bond Pricing In The Primary Market: The Issuer Effect And Pricing Factors. International Review of Financial Analysis. 85 102431. https://doi.org/10.1016/j.irfa.2022.102431

TitleCatastrophe Bond Pricing In The Primary Market: The Issuer Effect And Pricing Factors
TypeJournal article
AuthorsChatoro, M, Mitra, S., Pantelous, A.A. and Shao, J.
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 1997-2020. We 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 that significantly impact bond pricing and volatility, such as the issuer’s line of business accounting 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

KeywordsCatastrophe risk bonds
primary market
multilevel modelling
issuer effect
hedging
Article number102431
JournalInternational Review of Financial Analysis
Journal citation85
ISSN1057-5219
1873-8079
Year2023
PublisherElsevier
Accepted author manuscript
License
CC BY-NC-ND 4.0
File Access Level
Open (open metadata and files)
Digital Object Identifier (DOI)https://doi.org/10.1016/j.irfa.2022.102431
Publication dates
Published online26 Nov 2022
Published in printJan 2023

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