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Wednesday, August 4 • 1:00pm - 2:30pm
7C3 Common Risk Factors in the Cross-Section of Cat Bond Returns

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Markus Herrmann, University of Duisberg-Essen; Martin Hibbeln, University of Duisberg-Essen; Alexander Braun, University of St. Gallen

Cat bonds provide large yield spreads and low volatility compared to the corporate bond market. While there is an extensive literature that explains (ex-ante) cat bonds spreads, there is no factor model in the academic literature that explains their (ex-post) realized returns. Based on monthly quoted prices for the complete cat bond market from 2001-2020, we provide insights into relevant risk factors in the cross-section of cat bond returns. In preliminary results, we find that the initial probability of first loss as well as a measure that accounts for seasonal fluctuations strongly predict future cat bond returns. Based on these results we develop factor models for the expected excess returns (risk premiums) of cat bond portfolios. Controlling for probability of first loss, we can show that the type of trigger, the peril and the territory do not seem to be priced. However, we find that multi-peril and multi-location cat bonds carry a significant risk premium.

avatar for Morton Lane

Morton Lane

Director, MSFE; President, Lane Financial LLC, University of Illinois
Dr. Morton N. Lane is the Director of the Master of Science in Financial Engineering program at the University of Illinois at Urbana-Champaign. The program started under him in 2010 and was recognized by TFE “The Financial Engineer” as the 2021, 4th best FE program in North America.Dr... Read More →


Markus Herrmann

University of Duisburg-Essen

Alexander Braun

University of St. Gallen

Wednesday August 4, 2021 1:00pm - 2:30pm EDT