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Climate variability and catastrophe bond premiums

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  • Feng, Chi
  • Zeng, Xudong

Abstract

This study examines the impact of climate variability, represented by the El Niño-Southern Oscillation (ENSO), on catastrophe (cat) bond issuance premiums. Using a primary market dataset and comparing two-level mixed effect models (TLMs) with a generalized additive model (GAM), we find a nonlinear and asymmetric relationship between ENSO activity and premiums of non-earthquake cat bonds. La Niña activity, particularly of moderate to high intensity, is associated with marked premium increases, while the effects of El Niño are overall less pronounced. These findings are robust across alternative specifications and particularly evident in the U.S. hurricane subsample. Among experienced issuers with larger issued volumes, the ENSO effect becomes more linear compared to less experienced issuers, where intensifying La Niña (El Niño) activity corresponds to an almost-linear increase (decrease) in premiums. Our study underscores the importance of incorporating climate variability into catastrophe risk assessment and pricing frameworks.

Suggested Citation

  • Feng, Chi & Zeng, Xudong, 2025. "Climate variability and catastrophe bond premiums," Finance Research Letters, Elsevier, vol. 86(PD).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pd:s1544612325018781
    DOI: 10.1016/j.frl.2025.108624
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    References listed on IDEAS

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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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