Authors:

  • Erik Stafford
  • Joshua Coval

Excerpt

Economic Catastrophe Bonds. Joshua D. Coval, Erik Stafford,  June 2009, Paper. "The central insight of asset pricing is that a security's value depends on both its distribution of payoffs across economic states and state prices. In fixed income markets, many investors focus exclusively on estimates of expected payoffs, such as credit ratings, without considering the state of the economy in which default is likely to occur. Such investors are likely to be attracted to securities whose payoffs resemble those of economic catastrophe bonds - bonds that default only under severe economic conditions..." Link