A Cat Bond Premium Puzzle?

Catastrophe Bonds whose payoffs are tied to the occurrence of natural disasters offer insurers the ability to hedge event risk through the capital markets that could otherwise leave them insolvent if concentrated solely on their own balance sheets. At the same time, they offer investors a unique opportunity to enhance their portfolios with an asset that provides an attractive return that is uncorrelated with typical financial securities Despite its attractiveness, spreads in this market remain considerably higher than the spreads for comparable speculative grade debt. This paper uses results from behavior economics to suggest why cat bonds have not been more attractive to the investment community at current prices. In particular, the authors suggest that "ambiguity aversion", "loss aversion", and "uncertainty avoidance" may account for the reluctance of investment managers to invest in these products. In addition, since Catastrophe Bonds are a new type of investment, investors must invest time and money up front in order to educate themselves about the legal and technical complexities of the Cat Bond market before that investor can make a "to-buy or not-to-buy" decision. Such a transaction cost may reduce the attractiveness of the new bonds to the point where the investor would prefer to stay out of the market. The bulk of the paper consists of quantitative assessments of each of these hypotheses, along with a demonstration that Cat Bonds are indeed much more attractive than high yield bonds in terms of their Sharpe ratios (the ratio of the "excess return" over the risk free rate to the standard deviation of returns on the bonds). This is accomplished by simulating potential losses for hypothetical Cat Bonds under a wide variety of hurricane scenarios for the Miami/Dade county are. These findings lead the authors to suggest that issuers of Cat Bonds could themselves take steps to lower the cost of placing risk in this manner. Specifically, issuers might standardize a simple structure of terms to decrease the investor's cost of education. In addition issuers could better quantify and reduce pricing uncertainty. These steps will should increase demand for these instruments and produce a concomitant reduction in price.

Topological Excitations near the Local Critical Point in the Dissipative 2D XY model

The dissipative XY model in two spatial dimensions belongs to a new universality class of quantum critical phenomena with the remarkable property of the decoupling of the critical fluctuations in space and time. We have shown earlier that the quantum critical point is driven by proliferation in time of topological configurations that we termed warps. We show here that a warp may be regarded as a configuration of a monopoles surrounded symmetrically by anti-monopoles so that the total charge of the configuration is zero. Therefore the interaction with other warps is local in space. They however interact with other warps at the same spatial point logarithmically in time. As a function of dissipation warps unbind leading to a quantum phase transition. The critical fluctuations are momentum independent but have power law correlations in time

Kondo and charge fluctuation resistivity due to Anderson impurities in graphene

Motivated by experiments on ion irradiated graphene, we compute the resistivity of graphene with dilute impurities. In the local moment regime we employ the perturbation theory up to third order in the exchange coupling to determine the behavior at high temperatures within the Kondo model. Resistivity due to charge fluctuations is obtained within the mean field approach on the Anderson impurity model. Due to the linear spectrum of the graphene the Kondo behavior is shown to depend on the gate voltage applied. The location of the impurity on the graphene sheet is an important variable determining its effect on the Kondo scale and resistivity. Our results show that for chemical potential nearby the node the charge fluctuations is responsible for the observed temperature dependence of resistivity while away from the node the spin fluctuations take over. Quantitative agreement with experimental data is achieved if the energy of the impurity level varies linearly with the chemical potential.Comment: 17 pages, 15 figures, published versio

Theory of Superconductivity in the Cuprates

The quantum critical fluctuations of the time-reversal breaking order parameter which is observed in the pseudogap regime of the Cuprates are shown to couple to the lattice equivalent of the local angular momentum of the fermions. Such a coupling favors scattering of fermions through angles close to $\pm \pi/2$ which is unambiguously shown to promote d-wave pairing. The right order of magnitude of both $T_c$ and the normalized zero temperature gap $\Delta/T_c$ are calculated using the same fluctuations which give the temperature, frequency and momentum dependence of the the anomalous normal state properties for dopings near the quantum-critical value and with two parameters extracted from fit to such experiments.Comment: Accepted for publication in PRB with the title "Theory of the coupling of quantum-critical fluctuations to fermions and d-wave superconductivity in the cuprates

Optimal stopping times for estimating Bernoulli parameters with applications to active imaging

We address the problem of estimating the parameter of a Bernoulli process. This arises in many applications, including photon-efficient active imaging where each illumination period is regarded as a single Bernoulli trial. We introduce a framework within which to minimize the mean-squared error (MSE) subject to an upper bound on the mean number of trials. This optimization has several simple and intuitive properties when the Bernoulli parameter has a beta prior. In addition, by exploiting typical spatial correlation using total variation regularization, we extend the developed framework to a rectangular array of Bernoulli processes representing the pixels in a natural scene. In simulations inspired by realistic active imaging scenarios, we demonstrate a 4.26 dB reduction in MSE due to the adaptive acquisition, as an average over many independent experiments and invariant to a factor of 3.4 variation in trial budget.Accepted manuscrip

Theory of the Quantum Critical Fluctuations in Cuprates

The statistical mechanics of the time-reversal and inversion symmetry breaking order parameter, possibly observed in the pseudogap region of the phase diagram of the Cuprates, can be represented by the Ashkin-Teller model. We add kinetic energy and dissipation to the model for a quantum generalization and show that the correlations are determined by two sets of charges, one interacting locally in time and logarithmically in space and the other locally in space and logarithmically in time. The quantum critical fluctuations are derived and shown to be of the form postulated in 1989 to give the marginal fermi-liquid properties. The model solved and the methods devised are likely to be of interest also to other quantum phase transitions