This paper aims at whether CAT bonds can be regarded as a diversification instrument by comparing their performance before, dur-ing, and after the subprime financial crisis in 2007. Based on the corre-lation model, it is possible to obtain estimation of the correlation be-tween CAT bonds returns and government bonds returns, or the stock market returns. CAT bonds were affected by the subprime financial crisis, exhibiting a behavior not consistent with a zero-beta instrument. The results indicate that CAT bonds have positive correlations with government bonds and stock. Therefore, if a CAT bond is chosen to balance the risk of investment, its returns should be considered instead of assuming that it will not be affected by a financial crisis.
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