RT Journal Article
SR Electronic
T1 CAT Bond Spreads via HARA Utility and Nonparametric Tests
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2018.1.062
DO 10.3905/jfi.2018.1.062
A1 Denis-Alexandre Trottier
A1 VanSon Lai
A1 Anne-Sophie Charest
YR 2018
UL https://pm-research.com/content/early/2018/06/11/jfi.2018.1.062.abstract
AB After deriving a new utility-based model for pricing catastrophe (CAT) bonds under hyperbolic absolute risk aversion (HARA), we propose two specification tests that use nonparametric estimation techniques to test simultaneously for all possible misspecifications. Existing pricing models, including our new one, are then estimated and tested using CAT bonds primary market data. The utility-based model we propose not only is well-suited for explaining the risk-return relation observed in the CAT bond market but also delivers the best performance among the tested models. We also provide new empirical evidence that the aggregate utility function of CAT bond investors exhibits decreasing absolute risk aversion.