Life Insurer Cost of Equity with Asymmetric Risk Factors

37 Pages Posted: 24 Jun 2014

See all articles by Vickie L. Bajtelsmit

Vickie L. Bajtelsmit

Colorado State University, Fort Collins

Sriram V. Villupuram

University of Texas at Arlington - Department of Finance and Real Estate

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Multiple version iconThere are 3 versions of this paper

Date Written: February 18, 2014

Abstract

Although various asymmetric measures of market risk have been shown to be priced factors for the broader equity market, life insurer realized equity returns include a much larger premium for bearing downside risk, even after controlling for firm characteristics and other measures of risk. Cross-sectional regression analysis finds a positive (negative) premium for downside (upside) betas, conditional on down and up markets respectively. Coskewness and cokurtosis are also priced factors. Given the life insurance industry’s unique role in providing long term protection to U.S. households and the relative importance of market returns to firm performance in this industry, equity investors in these firms require a larger premium for bearing this type of risk than is typical for stocks in other industries.

Keywords: Cost of equity; Upside risk; Downside risk; Equity market; Life insurance industry

JEL Classification: G12, G22

Suggested Citation

Bajtelsmit, Vickie L. and Villupuram, Sriram V. and Wang, Tianyang, Life Insurer Cost of Equity with Asymmetric Risk Factors (February 18, 2014). Available at SSRN: https://ssrn.com/abstract=2398105 or http://dx.doi.org/10.2139/ssrn.2398105

Vickie L. Bajtelsmit

Colorado State University, Fort Collins ( email )

Fort Collins, CO 80523-1771
United States

Sriram V. Villupuram

University of Texas at Arlington - Department of Finance and Real Estate ( email )

Box 19449 UTA
Arlington, TX 76019
United States

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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