Premium
Accuracy of Premium Calculation Models for CAT Bonds—An Empirical Analysis
Author(s) -
Galeotti Marcello,
Gürtler Marc,
Winkelvos Christine
Publication year - 2013
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2012.01482.x
Subject(s) - bond , contrast (vision) , econometrics , predictive power , economics , bond market , risk premium , sample (material) , relevance (law) , financial economics , computer science , monetary economics , finance , political science , philosophy , chemistry , epistemology , chromatography , artificial intelligence , law
CAT bonds are of significant importance in the field of alternative risk transfer. Because 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 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.