Tuesday, March 1st @ 11:00-12:30 PM (ONLINE)
Common Risk Factors in the Cross Section of Catastrophe Bond Returns
Alex Braun, University of St. Gallen
Abstract: Catastrophe bonds are an alternative asset class with high excess returns, 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 four-factor model based on these insights explains 60% of the historical excess return variation in the cat bond market and more than halves the asset class’ alpha left by the Fama & French (1993) model with TERM and DEF.