CATASTROPHE BONDS: the effect of structural change on pricing during the financial crisis

Sammanfattning: The main purpose of this work is to investigate whether the price of catastrophe bonds would be significantly affected if a dummy variable reflecting the change in the catastrophe bond structure is incorporated into the reviewed pricing models. The theoretical framework includes modern theories related to catastrophe bonds, the catastrophe bonds market development and several existing catastrophe bond pricing models. Data sample consisting of 211 catastrophe bonds issued during the period 2004 - 2010. Quantitative approach using multiple regression analysis with cross-sectional data. Our findings show that catastrophe bonds’ spreads are significantly affected by the safer TRS structure introduced after September 2008. Also, structures which do not involve TRS counterparty do not influence bonds’ spreads significantly. The changes in the structure show a positive effect on bonds’ spread, which was proven by all pricing models, except for the Lane and Mahul (2008) all-bonds model with a “Single Peril Indicator”.