@article {Trottierjfi.2018.1.062, author = {Denis-Alexandre Trottier and Van Son Lai and Anne-Sophie Charest}, title = {CAT Bond Spreads via HARA Utility and Nonparametric Tests}, elocation-id = {jfi.2018.1.062}, year = {2018}, doi = {10.3905/jfi.2018.1.062}, publisher = {Institutional Investor Journals Umbrella}, abstract = {After deriving a new utility-based model for pricing catastrophe (CAT) bonds under hyperbolic absolute risk aversion (HARA), we propose two specification tests that use nonparametric estimation techniques to test simultaneously for all possible misspecifications. Existing pricing models, including our new one, are then estimated and tested using CAT bonds primary market data. The utility-based model we propose not only is well-suited for explaining the risk-return relation observed in the CAT bond market but also delivers the best performance among the tested models. We also provide new empirical evidence that the aggregate utility function of CAT bond investors exhibits decreasing absolute risk aversion.}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/early/2018/06/11/jfi.2018.1.062.1}, eprint = {https://jfi.pm-research.com/content/early/2018/06/11/jfi.2018.1.062.1.full.pdf}, journal = {The Journal of Fixed Income} }