Accuracy of pricing models for CAT Bonds - an empirical analysis

(CAT-)astrophe Bonds are of significant importance in the field of alternative risk transfer. Since the market of CAT Bonds is not as liquid as e.g. the stock market, the use of pricing models is of high relevance. One important parameter in all pricing models is the probability of catastrophe. Consequently, there are two possibilities of determination. On the one hand, if we have an expectation regarding the probability of catastrophe, the value of the bond can be calculated using a model. On the other hand, if the price of the bond is known, we can implicitly calculate the probability of catastrophe. This probability is used in this paper in order to determine a method to measure accuracy of pricing models. Furthermore, an adjustment for cyclic and seasonal effects is established with the objective of verifying their effects on pricing of CAT Bonds.