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Coval, Joshua D.,
Jakub W. Jurek, and
Erik Stafford. 2009. "Economic Catastrophe Bonds."
,
99(3): 628-66.
Show Article Details
DOI: 10.1257/aer.99.3.628
Abstract:The central insight of asset pricing is that a security's value depends both on
its distribution of payoffs across economic states and on state prices. In fixed
income markets, many investors focus exclusively on estimates of expected
payoffs, such as credit ratings, without considering the state of the economy
in which default occurs. Such investors are likely to be attracted to securities
whose payoffs resemble economic catastrophe bonds—bonds that default
only under severe economic conditions. We show that many structured finance
instruments can be characterized as economic catastrophe bonds, but offer far
less compensation than alternatives with comparable payoff profiles. (JEL G11,
G12)
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Authors:
Coval, Joshua D. (Harvard U)
Jurek, Jakub W. (Bendheim Center for Finance, Princeton U)
Stafford, Erik (Harvard U)
JEL Classifications:
G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates
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