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Seasonality in catastrophe bonds and market‐implied catastrophe arrival frequencies

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  • Markus Herrmann
  • Martin Hibbeln

Abstract

We develop a conceptual framework to model the seasonality in the probability of catastrophe bonds being triggered. This seasonality causes strong seasonal fluctuations in spreads. For example, the spread on a hurricane bond is highest at the start of the hurricane season and declines as time goes by without a hurricane. The spread is lowest at the end of the hurricane season assuming the bond was not triggered, and then gradually increases as the next hurricane season approaches. The model also implies that the magnitude of the seasonality effect increases with the expected loss and the approaching maturity of the bond. The model is supported by an empirical analysis that indicates that up to 47% of market fluctuations in the yield spreads on single‐peril hurricane bonds can be explained by seasonality. In addition, we provide a method to obtain market‐implied distributions of arrival frequencies from secondary market spreads.

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  • Markus Herrmann & Martin Hibbeln, 2021. "Seasonality in catastrophe bonds and market‐implied catastrophe arrival frequencies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(3), pages 785-818, September.
    • Handle: RePEc:bla:jrinsu:v:88:y:2021:i:3:p:785-818
    DOI: 10.1111/jori.12335
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    Cited by:

    1. Dixon Domfeh & Arpita Chatterjee & Matthew Dixon, 2022. "A Unified Bayesian Framework for Pricing Catastrophe Bond Derivatives," Papers 2205.04520, arXiv.org.

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