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Designing Catastrophe Bonds to Securitize Systemic Risks in Agriculture: The Case of Georgia Cotton

Author

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  • Vedenov, Dmitry V.
  • Epperson, James E.
  • Barnett, Barry J.

Abstract

This article makes an initial attempt to design catastrophe (CAT) bond products for agriculture and examines the potential of these instruments as mechanisms for transferring agricultural risks from insurance companies to investors/speculators in the global capital market. The case of Georgia cotton is considered as a specific example. The CAT bond contracts are based on percentage deviations of realized state average yields relative to the long-run average. The contracts are priced using historical state-level cotton yield data. The principal finding of the study is that the proposed CAT bonds demonstrate potential as risk transfer mechanisms for crop insurance companies.

Suggested Citation

  • Vedenov, Dmitry V. & Epperson, James E. & Barnett, Barry J., 2006. "Designing Catastrophe Bonds to Securitize Systemic Risks in Agriculture: The Case of Georgia Cotton," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(02), August.
  • Handle: RePEc:ags:jlaare:8610
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    References listed on IDEAS

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    1. Schnitkey, Gary D. & Miranda, Mario J., 1993. "The Impact Of Pollution Controls On Livestock-Crop Producers," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
    2. Martinez, Stephen W., 1999. "Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products," Agricultural Economics Reports 34031, United States Department of Agriculture, Economic Research Service.
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    Cited by:

    1. Ostap Okhrin & Martin Odening & Wei Xu, 2013. "Systemic Weather Risk and Crop Insurance: The Case of China," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 351-372, June.
    2. Mitchell, Paul D. & Knight, Thomas O., 2008. "Economic Analysis of Supplemental Deductible Coverage as Recommended in the USDA's 2007 Farm Bill Proposal," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(01), pages 117-131, April.
    3. Coble, Keith H. & Barnett, Barry J., 2008. "Implications of Integrated Commodity Programs and Crop Insurance," Journal of Agricultural and Applied Economics, Cambridge University Press, pages 431-442.
    4. Xu, Wei & Odening, Martin & Musshoff, Oliver, 2008. "Optimal Design of Weather Bonds," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6781, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Turvey, Calum G. & Chantarat, Sommarat, 2006. "Weather-Linked Bonds," Proceedings: 2006 Agricultural and Rural Finance Markets in Transition, October 2-3, 2006; Washington, DC 133091, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    6. Zhiwei Shen & Martin Odening, 2013. "Coping with systemic risk in index-based crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 44(1), pages 1-13, January.
    7. Epperson, James E., 2008. "Securitizing peanut production risk with catastrophe (CAT) bonds," Faculty Series 44512, University of Georgia, Department of Agricultural and Applied Economics.
    8. Arnaud Rault & St├ęphane Krebs, 2011. "Catastrophic risk and risk management, what do we know about livestock epidemics? State of the art and prospects," Working Papers SMART - LERECO 11-05, INRA UMR SMART-LERECO.
    9. Rault, Arnaud & Krebs, Stephane, 2011. "Livestock epidemics and catastrophic risk management: State of the art and prospects on economic dynamics," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114793, European Association of Agricultural Economists.

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