PT - JOURNAL ARTICLE AU - Denis-Alexandre Trottier AU - Van Son Lai AU - Anne-Sophie Charest TI - CAT Bond Spreads via HARA Utility and Nonparametric Tests AID - 10.3905/jfi.2018.1.062 DP - 2018 Jun 10 TA - The Journal of Fixed Income PG - jfi.2018.1.062 4099 - https://pm-research.com/content/early/2018/06/11/jfi.2018.1.062.1.short 4100 - https://pm-research.com/content/early/2018/06/11/jfi.2018.1.062.1.full AB - 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.