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 75
OP 99
DO 10.3905/jfi.2018.1.062
VO 28
IS 1
A1 Trottier, Denis-Alexandre
A1 Lai, Van Son
A1 Charest, Anne-Sophie
YR 2018
UL http://jfi.pm-research.com/content/28/1/75.abstract
AB After deriving a new utility-based model for pricing catastrophe (CAT) bonds under hyperbolic absolute risk aversion (HARA), the authors propose two specification tests that use nonparametric estimation techniques to test simultaneously for all possible misspecifications. Existing pricing models, including this new one, are then estimated and tested using CAT bond primary market data. The utility-based model they 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. The authors also provide new empirical evidence that the aggregate utility function of CAT bond investors exhibits decreasing absolute risk aversion.TOPICS: Fixed income and structured finance, statistical methods, performance measurement