Catastrophe Bonds: Analysis of the Performance as an Asset Class and Evaluation of Diversification Benefits

Abstract

Catastrophe bonds are a major category of insurance linked securities. CAT bonds are financial instruments, that transfer catastrophic risk from companies and governments to the capital markets. These securities are an effective risk transfer mechanism, that provide reinsurance coverage to companies that otherwise wouldn’t be able to survive such losses.These instruments are also attractive to investors. Since factors that drive financial markets have no influence on the occurrence of natural catastrophes, events such as financial crises and market corrections do not affect the returns of these bonds. Therefore, these instruments provide a great deal of diversification. In my thesis analyze the performance and the diversification benefit of the asset class by comparing it to non-investment grade corporate bonds.