The Impact of Financial Crises and Natural Disasters on the US Catastrophe Bond Market

Abstract: Catastrophe (CAT) bonds bring the needs of (re)insurance companies and investors together: They insure against natural disasters by transferring risk to the capital market while at the same time promising high returns and a certain detachment from financial markets. Being an alternative investment class that has been on the rise only in recent years, academic research on CAT bonds is comparatively limited. The thesis aims to fill a research gap by exploring new angles and taking upon previous research and extending its temporal scope. The thesis’ goal is to shed light on financial market- and disaster-related patterns that shape the US-American CAT bond market. Several analyses (GARCH-BEKK model, OLS regression models and diversification ratio) are conducted on the one hand to explore the impact financial crises have on the CAT bond market and on the other hand to assess the indirect impact of the cyclical weather patterns El Niño-Southern Oscillation (ENSO) on the performance of CAT bonds. The analyses of the two research questions of interest cover either the period from 2002 until 2022 or from 2005 until 2019. The thesis reveals that CAT bonds are a sound diversifying instrument, also in times of financial crisis. Moreover, it uncovers a geophysical dependence of Atlantic hurricanes on the ENSO, but at the same time a rather weak link between Atlantic hurricanes and the performance of CAT bonds.