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

  • Galeotti, Marcello
  • Gürtler, Marc
  • Winkelvos, Christine
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    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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    File URL: http://econstor.eu/bitstream/10419/55239/1/684929015.pdf
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    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
    Contact details of provider: Postal: Pockelsstr. 14, D-38106 Braunschweig
    Web page: http://www.fiwi.tu-bs.de/

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    1. Furman, Edward & Zitikis, Ricardas, 2008. "Weighted premium calculation principles," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 459-465, February.
    2. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
    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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