Week InReview: February 14, 2020
Catastrophes and Correlations
"In 2017 the World Bank issued some pandemic bonds. Investors who bought these bonds got a high interest rate, but they could lose all their money if there was a pandemic. The bonds would “trigger” if a pandemic occurred, and then instead of paying back the bondholders, the money would go to the World Bank to fund relief efforts. The bonds "were originally conceived as a sort of public-private partnership to get insurance investors to assume some of the risk of the Ebola epidemic.
"One way to read the pandemic bond story is that the risk of an Ebola outbreak spreading from Congo to Rwanda does not seem likely to be highly correlated with global financial markets, but the risk of a deadly coronavirus spreading from China to the rest of the world probably is pretty correlated with global financial markets: The actual coronavirus is shutting down factories, disrupting trade, and generally causing large economic impacts even as it is also risking triggering the bonds. People may have bought these bonds with the wrong disease, and the wrong correlation model, in mind."
Read entire Week InReview: February 14, 2020