Bilateral Relationships Between Catastrophe and Sovereign Bonds on the Example of a Number of Countries of the Belt and Road Initiative

Abstract

The article proposes a method for assessing the bilateral relationships between catastrophe and sovereign bonds to analyze financial risks within the framework of China’s global infrastructure initiative “Belt and Road”. Countries included in the China - EU land transport corridor have a high risk of natural disasters, which could negatively affect the infrastructure being created and local communities. Investments in infrastructure projects by China are often made subject to sovereign guarantees from partner countries. In case of natural disasters, the traditional use of state reserve funds is not always effective, since the insurance markets of the countries of the China - EU land transport corridor are dominated by protectionism, the indicator of which is the low level of import of insurance services. As a more effective tool for covering losses in the event of catastrophic threats to the infrastructure of the China - EU transport corridor, one can consider insurance derivatives (Insurance Linked Securities - ILS) and sovereign parametric catastrophe bonds, in particular. The article analyzes the relationship between catastrophe and sovereign bonds of a number of countries (China, Kazakhstan, Russia, Turkey). Based on the results of testing the hypothesis (H1), the dependence of the interest rate on sovereign bonds of Kazakhstan, China, Russia and Turkey on the interest rates on catastrophic bonds of the Swiss Re Cat Bonds Index was established. A complete inverse relationship between catastrophe bond rates and sovereign bond rates, in accordance with hypothesis (H2), was not revealed.

Keywords

• insurance derivatives
• belt and road initiative
• catastrophe bonds
• sovereign bonds
• financial risks
• insurance securities
• insurance-related securities