Catastrophe bonds and portfolio management

Abstract

Catastrophe bonds were first created to compensate for the shortage of financial capacity
of the insurance of natural catastrophes of the global reinsurance market. The marketing of
catastrophe bonds is based on the common sense feeling that natural catastrophes are
uncorrelated with systemic financial market risk. We show, however, that the financial
attractiveness of catastrophe bonds should not be overstated, because, under certain circumstances,
such a bond is exposed to interest rate risk.