Measuring the liquidity impact on catastrophe bond spreads

Zhao, Yang; Yu, Min‐Teh

doi:10.1016/j.pacfin.2019.06.006

Cited by 12 publications

(3 citation statements)

References 29 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Thus, high-yield CAT bond spreads vs comparably rated corporate bonds may be due to liquidity risk premium. However, Zhao and Yu (2019) find that the liquidity risk premium can explain only a small portion of the high-yield spreads of CAT bonds. They find that the mean value of the liquidity premium is 67.57bps, accounting for only 9.42% of the average CAT bond spread (717.37bps) in the secondary market during the period 2002-2016.…”

Section: Cat Bondmentioning

confidence: 82%

See 1 more Smart Citation

Catastrophe risk, reinsurance and securitized risk-transfer solutions: a review

Zhao

Lee

2021

CFRI

Self Cite

View full text Add to dashboard Cite

PurposeCatastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.Design/methodology/approachThis research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.FindingsThe authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.Originality/valueThis research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.

show abstract

Section: Cat Bondmentioning

confidence: 82%

“…(e.g. Lee and Yu, 2002;Braun, 2016;G€ urtler et al, 2016;Zhao and Yu, 2019;Herrmann and Hibbeln, 2021).…”

Section: Introductionmentioning

confidence: 99%

Catastrophe risk, reinsurance and securitized risk-transfer solutions: a review

Zhao

Lee

2021

CFRI

Self Cite

View full text Add to dashboard Cite

show abstract

“…Braun (2016) and Gürtler et al (2016) have implemented the issue volume and maturity as liquidity measures but results are inconclusive. Zhao and Yu (2019) attempt to proxy cat bond liquidity through various cat bond specific and pricing related variables; however, due to the lack of observable trade characteristics, they are unable to compute established liquidity measures from the corporate bond literature which rely on trading volume and/or trading frequency. 1 Instead, Braun et al (2019) state that the separation of the liquidity premium from other yield spread components is currently not possible for Insurance Linked Securities (ILS) due to limitations in ILS data.…”

mentioning

confidence: 99%

Trading and liquidity in the catastrophe bond market

Herrmann

Hibbeln

2022

J of Risk & Insurance

View full text Add to dashboard Cite

We provide first insights into secondary market trading, liquidity determinants, and the liquidity premium of catastrophe bonds. Based on transaction data from TRACE (Trade Reporting and Compliance Engine), we find that cat bonds are traded less frequently during the hurricane season and more often close to maturity. Trading activity indicates that the market is dominated by brokers without a proprietary inventory. Liquidity is high in periods of high trading activity in the overall market and for bonds with low default risk or close to maturity, which results from lower order processing costs. Finally, using realized bid-ask spreads as a liquidity measure, we find that on average, 21% of the observable yield spread on the cat bond market is attributable to the liquidity premium, with a magnitude of up to 141 bps for high-risk bonds.

show abstract