Abstract
Although several works have highlighted the diversification benefits of catastrophe (CAT) bond funds as well as the attracting returns they offer, there is a lack in the literature regarding what econometric models are suitable to predict the risks of such funds. This note contributes by offering such a statistical description of the dynamics of CAT bond indices total returns series. The approach is based on a regime-switching model that parsimoniously accounts for the leptokurtosis, skewness, and autocorrelation of returns, as well as for (G)ARCH effects, seasonality, and the sudden impact of natural disasters. Estimation and specification testing is carried out for four weekly indices tracking the performance of different CAT bond sectors; this allows identifying several salient stylized features for the returns dynamics of this asset class.
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