The diffusion of complex securities: the case of CAT bonds

José Afonso Faias; José Guedes

doi:10.1016/j.insmatheco.2019.10.011

The diffusion of complex securities: the case of CAT bonds

José Afonso Faias^*, José Guedes

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

8 Citations (Scopus)

Abstract

Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.

Original language	English
Pages (from-to)	46-57
Number of pages	12
Journal	Insurance: Mathematics and Economics
Volume	90
DOIs	https://doi.org/10.1016/j.insmatheco.2019.10.011
Publication status	Published - Jan 2020

Keywords

Bayesian updating
CAT bonds
Innovation
Learning
Reinsurance

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10.1016/j.insmatheco.2019.10.011

Cite this

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title = "The diffusion of complex securities: the case of CAT bonds",

abstract = "Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.",

keywords = "Bayesian updating, CAT bonds, Innovation, Learning, Reinsurance",

author = "Faias, {Jos{\'e} Afonso} and Jos{\'e} Guedes",

note = "Funding Information: We thank the editor and two anonymous referees whose suggestions helped improve and clarify this manuscript. We also thank Rui Albuquerque, Geraldo Cerqueiro, Miguel Ferreira, Leonid Kogan, Paolo Pasquariello, Lasse H. Pedersen, Pedro Santa-Clara, and all participants in the Lisbon Brownbag Seminar and 2016 FMA Europe for helpful comments. This research was funded by grants UID/GES/00407/2013, PTDC/IIM-FIN/2977/2014 and PTDC/EGE-OGE/30314/2017 of the Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia-FCT. Publisher Copyright: {\textcopyright} 2019 Elsevier B.V.",

year = "2020",

month = jan,

doi = "10.1016/j.insmatheco.2019.10.011",

language = "English",

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T2 - the case of CAT bonds

AU - Faias, José Afonso

AU - Guedes, José

N1 - Funding Information: We thank the editor and two anonymous referees whose suggestions helped improve and clarify this manuscript. We also thank Rui Albuquerque, Geraldo Cerqueiro, Miguel Ferreira, Leonid Kogan, Paolo Pasquariello, Lasse H. Pedersen, Pedro Santa-Clara, and all participants in the Lisbon Brownbag Seminar and 2016 FMA Europe for helpful comments. This research was funded by grants UID/GES/00407/2013, PTDC/IIM-FIN/2977/2014 and PTDC/EGE-OGE/30314/2017 of the Fundação para a Ciência e Tecnologia-FCT. Publisher Copyright: © 2019 Elsevier B.V.

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N2 - Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.

AB - Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.

KW - Bayesian updating

KW - CAT bonds

KW - Innovation

KW - Learning

KW - Reinsurance

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SN - 0167-6687

VL - 90

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JO - Insurance: Mathematics and Economics

JF - Insurance: Mathematics and Economics

ER -

The diffusion of complex securities: the case of CAT bonds

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Keywords

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CUBE: Católica Lisbon Research Unit in Business and Economics

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The diffusion of complex securities: the case of CAT bonds

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Keywords

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CUBE: Católica Lisbon Research Unit in Business and Economics

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