##plugins.themes.bootstrap3.article.main##

  •   Chaouki Mouelhi

Abstract

This study examines the relationship between Cat Bonds market and the other financial markets. Precisely, cointegration tests (the Engle and Granger’s methodology) were applied on weekly data of five indexes over the period 2012- 2019 to test for the existence of a long-run dynamic equilibrium relationship between Cat Bonds market and four financial markets, namely, Insurance Linked Securities (ILS) market, S&P 500 (first stock market), MSCI (second stock market) and Corporate Bonds market. In addition, a comparative analysis correlation vs cointegration was conducted to verify whether Cat Bonds can be really considered as zero-beta assets in the short-run (correlation) as well as the long-run (cointegration). For correlation analysis we employed three correlation coefficients (Pearson’s Correlation Coefficient, Spearman’s Rank Correlation Coefficient and Kendall's Rank Correlation Coefficient). Overall, the main findings of this study showed that in the short-run, Cat Bonds are partially zero-beta assets while over the long-run they are entirely zero-beta assets. Such results will be of great importance for investors in their decision choice between a short strategy or a long strategy in Cat Bonds’ investing.

Keywords: Cat Bonds, zero-beta assets, correlation, cointegration

References

H. Kat, “The dangers of using correlation to measure dependence,” Journal of Alternative Investments, vol.6, no.2, pp. 54-58, 2003.

C. Alexander, I. Giblin, and W. Weddington, “Cointegration and asset allocation: a new active hedge fund strategy,” Research in International Business and Finance, vol. 16, pp. 65-90, 2002.

E. P. Chan, (November, 6 2006). “Cointegration Is Not the Same as Correlation,” Quantitative investment and Trading ideas and research. Available: https://www.epchan.com/downloads/cointegration.pdf.

R. F. Engle and C. W. J. Granger, “Co-integration and error correction: Representation estimation and testing,” Econometrica, vol. 55, no.2, pp. 251–276, 1987.

J. Major and R. Kreps, “Catastrophe Risk Pricing in the Traditional Market,” Risk Books, 2003.

S. Bouriaux and R. MacMinn, “Securitization of Catastrophe Risk: New Developments in Insurance-Linked Securities and Derivatives,” Journal of Insurance Issues, vol. 32, no. 1, pp.1-34, 2009.

R. Litzenberger, D. Beaglehole and C. Reynolds, “Assessing Catastrophe Reinsurance-Linked Securities as a New Asset Class,” Journal of Portfolio Management, vol. 23, pp. 76-86, 1996.

Z. TAO, “Zero-Beta Characteristic of CAT Bonds,” In: BIFE ’11 Proceedings of the 2011 Fourth International Conference on Business Intelligence and Financial Engineering, pp. 641-644, 2011.

S. Dieckmann, “A Consumption-Based Evaluation of the Cat Bond Market.” Working Paper, Wharton School, University of Pennsylvania, Philadelphia, 2011.

M. Galeotti, M. Gürtler and C. Winkelvos, “Accuracy of Premium Calculation Models for CAT Bonds: An Empirical Analysis,” Journal of Risk and Insurance, vol. 80, no. 2, pp. 401-421, 2013.

J. Cummins and M. Weiss, “Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-transfer Solutions,” Journal of Risk and Insurance, vol. 76, no. 3, pp. 493-545, 2009.

P. Carayannopoulos and M. F. Perez, “Diversification through Catastrophe Bonds: Lessons from the Subprime Financial Crisis,” The Geneva Papers on Risk and Insurance-Issues and Practice, VOL. 40, no. 1, pp. 1-28, 2015.

M. Gürtler, M. Hibbeln and C. Winkelvos, “The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds,” The Journal of Risk and Insurance, vol. 83, no. 3, pp. 579-612, 2016.

J. D. Cummins, “CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments,” Risk Management and Insurance Review, vol.11, no. 1, pp. 23-47, 2008.

A. Krutov, “Investing in Insurance Risk: Insurance-linked Securities: A Practitioner's Perspective,” Risk Books, 2010.

L. G. Constantin, “Portfolio diversification through structured catastrophe bonds amidst the financial crisis,” Economic Sciences Series, vol. 63, no. 3, pp. :75-84, 2011.

D. S. A. Simoes, “Can we profit from natural disasters? The role of catastrophe bonds,”Dissertation, Universita Catolica Lisbon, 2015.

S. P. Clark, M. Dickson, and F. R. Neale, (July 7, 2016). “Portfolio Diversification Effects of Catastrophe Bonds,” SSRN. Available: https://ssrn.com/abstract=2806432

R. J. Kish, “Catastrophe (Cat) bonds: Risk offsets with diversification and high returns,” Financial Services Review, vol. 25, no. 3, pp. 303-329, 2016.

J. D. Haley, “Further Considerations of Underwriting Margins, Interest Rates, Stability, Stationarity, Cointegration, and Time Trends,” Journal of Insurance Issues, vol. 30, no 1, pp. 62-75, 2007.

D. A. Dickey and W. A. Fuller, “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econometrica, vol. 49, no 4, pp.1057–1072, 1981.

Downloads

Download data is not yet available.

##plugins.themes.bootstrap3.article.details##

How to Cite
Mouelhi, C. (2021). The Relationship Between Cat Bond Market and Other Financial Asset Markets: Evidence from Cointegration Tests. European Journal of Business and Management Research, 6(2), 78-85. https://doi.org/10.24018/ejbmr.2021.6.2.790