Can Entropy Model Explain the Cat Bond Premium Puzzle?

To encourage further development of catastrophe (cat) bond, understanding the causes of cat bond premium puzzle is necessitated. Considering the property of entropy to measure uncertainty, this paper establishes an entropy model about risk assessment in catastrophe bond investors´ decision making. Moreover, this article analyzes the model and compares relative influence through simulating actual behavior of both rational and non-rational investors. The conclusions obtained show that with inadequate information, cognitive biases and collecting cost increase the high yield demand of investors in cat bond market.