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Asset Pricing and Extreme Event Risk: Common Factors in ILS Fund Returns

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  • Ben Ammar, Semir
  • Braun, Alexander
  • Eling, Martin

Abstract

The returns of investment funds specializing in insurance-linked securities (ILS) exhibit a unique behavior. We introduce a new peril-based factor model, which explains the time-series and cross-sectional return variation. Despite a strong overall fit, we are left with significantly positive alphas for about one quarter of the funds, some of which can be attributed to beta exposures associated with non-cat-bond ILS. In addition, they are related to fund size, fund age, and performance fees. Although we do not find evidence for market timing abilities, we can rule out pure luck as the source of outperformance by controlling for false discoveries.

Suggested Citation

  • Ben Ammar, Semir & Braun, Alexander & Eling, Martin, 2016. "Asset Pricing and Extreme Event Risk: Common Factors in ILS Fund Returns," Working Papers on Finance 1621, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2016:21
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    2. Karl Demers‐Bélanger & Van Son Lai, 2020. "Diversification benefits of cat bonds: An in‐depth examination," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 29(5), pages 165-228, December.
    3. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2018. "The cross-section of expected stock returns in the property/liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 292-321.
    4. Peter Carayannopoulos & Olga Kanj & M. Fabricio Perez, 2022. "Pricing dynamics in the market for catastrophe bonds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 172-202, January.
    5. Faias, José Afonso & Guedes, José, 2020. "The diffusion of complex securities: The case of CAT bonds," Insurance: Mathematics and Economics, Elsevier, vol. 90(C), pages 46-57.
    6. Beer, Simone & Braun, Alexander, 2022. "Market-consistent valuation of natural catastrophe risk," Journal of Banking & Finance, Elsevier, vol. 134(C).
    7. Li, Han & Liu, Haibo & Tang, Qihe & Yuan, Zhongyi, 2023. "Pricing extreme mortality risk in the wake of the COVID-19 pandemic," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 84-106.
    8. Ftiti, Zied & Ben Ameur, Hachmi & Louhichi, Waël, 2021. "Does non-fundamental news related to COVID-19 matter for stock returns? Evidence from Shanghai stock market," Economic Modelling, Elsevier, vol. 99(C).
    9. Morton Lane, 2024. "The ILS loss experience: natural catastrophe issues 2001–2020," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(1), pages 97-137, January.
    10. Semir Ben Ammar, 2020. "Catastrophe Risk and the Implied Volatility Smile," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 381-405, June.
    11. Trottier, Denis-Alexandre & Lai, Van Son & Godin, Frédéric, 2019. "A characterization of CAT bond performance indices," Finance Research Letters, Elsevier, vol. 28(C), pages 431-437.
    12. Ahmad, Wasim & Kutan, Ali M. & Chahal, Rishman Jot Kaur & Kattumuri, Ruth, 2021. "COVID-19 Pandemic and firm-level dynamics in the USA, UK, Europe, and Japan," International Review of Financial Analysis, Elsevier, vol. 78(C).
    13. Markus Herrmann & Martin Hibbeln, 2023. "Trading and liquidity in the catastrophe bond market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(2), pages 283-328, June.
    14. Drobetz, Wolfgang & Schröder, Henning & Tegtmeier, Lars, 2020. "The role of catastrophe bonds in an international multi-asset portfolio: Diversifier, hedge, or safe haven?," Finance Research Letters, Elsevier, vol. 33(C).
    15. Markus Herrmann & Martin Hibbeln, 2021. "Seasonality in catastrophe bonds and market‐implied catastrophe arrival frequencies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(3), pages 785-818, September.
    16. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda & Melin, Olena, 2023. "Identification-robust beta pricing, spanning, mimicking portfolios, and the benchmark neutrality of catastrophe bonds," Journal of Econometrics, Elsevier, vol. 236(1).

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    More about this item

    Keywords

    Insurance-Linked Securities; Investment Funds; Factor Model; Catastrophe Bonds;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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