Statistical Analysis of the Spreads of Catastrophe Bonds at the Time of Issue

In this paper the catastrophe bond prices, as determined by the market, are analysed. The limited published work in this area has been carried out mainly by cat bond investors and is based either on intuition, or on simple linear regression on one factor or on comparisons of the prices of cat bonds with similar features. In this paper a Generalised Additive Model is fitted to the market data. The statistical significance of different factors which may affect the cat bond prices is examined and the effect of these factors on the prices is measured. A statistical framework and analysis could provide insight into the cat bond pricing and could have applications among other things in the construction of a cat bond portfolio, cat bond price indices and in understanding changes of the price of risk over time.

Keywords: Catastrophe Bonds; Bond Pricing; Regression; Generalised Additive Models