Work

Advancing sustainable financing through pandemic bond: a Bayesian model averaging approach to liquidity premia

Year: 2026

Type: article

Abstract: Pandemic bonds, as a subtype of catastrophe (CAT) bonds, are designed to transfer public health risks to capital markets, yet they face substantial liquidity risk due to their nascent market structure and limited risk design. Using a relatively small sample from 2020 to 2024, we apply Bayesian model averaging (BMA) and interpretable machine learning (IML) to examine the associations of macroeconomic and bond-specific characteristics with liquidity premia across market phases. We find that the average liquidity premium of natural catastrophe bonds (1364 bps) is substantially higher than that of pandemic bonds (452 bps), potentially reflecting differences in bond characteristics and contractual structures. The estimates suggest that higher ESG scores and higher disclosed health scores are associated with lower estimated pandemic-bond premia, with health-score categories receiving slightly greater posterior inclusion support than ESG in the joint specification. Pandemic bond premia are higher during hard market phases, while several predictors receive greater posterior inclusion support during soft markets. Overall, the results suggest that incorporating a health-specific index, alongside insights from traditional CAT and green bond design, could enhance the resilience of pandemic bonds and strengthen their role in sustainable development. Supplementary Information: The online version contains supplementary material available at https://doi.org/10.1186/s40854-026-00991-0.

Source: Financial Innovation

DOI: 10.1186/s40854-026-00991-0

Authors: Tianen Yao, Xinyu Yang, Yuhang Pan, Zhihan Cui, Ming Xu

Institution: Peking University

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: diamond

Funder: Bill and Melinda Gates Foundation

Awards: Peking University - To mobilize resources from China to support the GFATM, Gavi, and the Vaccine Alliance through policy analysis and advocacy activities by collabora..., Peking University - to promote and facilitate debt-to-health swaps in the Chinese context as an innovative approach to international development cooperation and help a...