Climate in the Price of a Bond: How Machine Learning Predicts Catastrophe Bond Coupons
In 1992, Hurricane Andrew tore through Florida, leaving insurers with $$15.5 billion in losses. Many companies went bankrupt, and the market devised a way to shift disaster risk onto investors: catastrophe bonds. These securities pay generous coupons as long as a specified disaster does not occur, such as a hurricane of a certain strength or an earthquake in a particular region.