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Accuracy of premium calculation models for CAT bonds: An empirical analysis

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  • Galeotti, Marcello
  • Gürtler, Marc
  • Winkelvos, Christine
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    Abstract

    CAT bonds are of significant importance in the field of alternative risk transfer. Since the market of CAT bonds is not complete, the application of an appropriate pricing model is of high relevance. We apply different premium calculation models in order to compare them with regard to their predictive power. Without taking the financial crisis into account, a version of the Wang transformation model and the linear model are the most accurate ones. In contrast, under consideration of the financial crisis, all analyzed models are approximately equivalent. Furthermore, we find that CAT bond specific information does not improve out-of-sample results. --

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    Bibliographic Info

    Paper provided by Technische Universität Braunschweig, Institute of Finance in its series Working Papers with number IF29V4.

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    Date of creation: 2009
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    Handle: RePEc:zbw:tbsifw:if29v4

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    Related research

    Keywords: CAT Bonds; Alternative Risk Transfer; Premium Calculation Models; Empirical Analysis;

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    1. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
    2. Furman, Edward & Zitikis, Ricardas, 2008. "Weighted premium calculation principles," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 459-465, February.
    3. J. David Cummins & Mary A. Weiss, 2009. "Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-Transfer Solutions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 493-545.
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