Failure to Share Natural Disaster Risk
90 Pages Posted: 23 Feb 2020 Last revised: 4 Feb 2021
Date Written: January 1, 2021
I test whether asset prices reflect risk-exposures of financial intermediaries in a setting that is well suited to tackling concerns about omitted risk factors. I analyze catastrophe bonds whose cash flows are linked to occurrences of natural disasters and find that 71% of security-level variation in expected returns can be explained by a theoretically-motivated measure of intermediaries' marginal utility. Assuming natural disasters are independent of aggregate wealth, this result is inconsistent with any alternative explanation based on unobserved macroeconomic risks. I also show that the aggregate premium has recently decreased when the intermediaries' access to outside capital has improved.
Keywords: Risk Sharing, Intermediary Asset Pricing, Reinsurance, Catastrophe Risk, Securitization
JEL Classification: G12, G22
Suggested Citation: Suggested Citation