How Catastrophe Bond Relate with Systemic Risk Free Essay Example, 2000 words

CAT bond are risk-related securities that would see the transfer of risk from sponsors to existing investors. Like any other bond, systemic risk will cause a decline in investors returns implying the decline of their other investments too. This risk is non-diversifiable and can be well solved by hedging. The aggregate market inherent risk arises from the financial crisis, interest rates in the overall market, recessions and wars among others. It causes fluctuation of return with regard to the macro-economic issues affecting all risky investments. The risk is unavoidable and the CAT bonds will always have the returns affected by currency, liquidity, interest rates, and inflation risk. The correlation degree of CAT bonds and I LS market in an investment of assets to the wider capital market is lower degree than others. However, it does not exclude it from harm in the case of currency break up. The last Eurozone sovereign debt crisis and the US economic change led to global economic i nstability which did not spare even the catastrophe bond. The financial crisis of 2008 was a perfect test of CAT bonds market when CAT bonds credit and equities registered a failure after the link between all assets was quite high. We will write a custom essay sample on How Catastrophe Bond Relate with Systemic Risk or any topic specifically for you Only $17.96 $11.86/page The liquidity of the bond is quite tight with limited trading where transactions are conducted away from the public scope.