The Portfolio Diversification Effect of Catastrophe Bonds and the Impact of COVID-19

This paper analyzes the correlation between catastrophe (cat) bonds and four other asset classes before and during the COVID-19 pandemic. Using a DCC-GARCH model and a dummy variable regression, our study suggests that cat bonds can be used as a strong safe haven for stocks before the pandemic and for infrastructure during the period. Moreover, we confirm correlation asymmetries when the market declines. In particular, we find significant asymmetries in the correlation of cat bonds with commodities before the pandemic, with private equity during the pandemic, and with infrastructure in both periods