Assessment of a pandemic emergency financing facility

Abstract

The pandemic bond issued by the World Bank (WB) in 2017 is a financial innovation enabling the transfer of the pandemic risk from the underdeveloped/developing countries to the financial market. It covers perils of various diseases that could overwhelm the global health systems and adversely impact the world economy. If all the triggers are activated, the bond’s principal and coupons are used to finance coordinated, swift and resilient medical response to safeguard the well-being of the populace. This product, however, is criticised for its onerous trigger requirements. We examine the WB’s pandemic-bond pricing framework, which requires inputs that are only partially available. From a rather unstructured COVID-19 data set, an information database is created and customised for pandemic-bond valuation. A vector auto-regressive moving average model is utilised to jointly describe the triggers dynamics. Our modelling simulations of risk triggers reveal that the bond payout could be made in less than half of the WB’s earliest opportunity of 85 days.