Life Insurer Cost of Equity with Asymmetric Risk Factors

23 Pages Posted: 17 Jul 2015

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: August 2015

Abstract

This study presents an improved model for estimating life insurer cost of capital with the inclusion of upside and downside risk factors and controlling for life insurer characteristics. 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.

Keywords: cost of equity, upside risk, downside risk, equity market, life insurance industry, prospect theory

JEL Classification: D81, G12, G22

Suggested Citation

Bajtelsmit, Vickie L. and Villupuram, Sriram V. and Wang, Tianyang, Life Insurer Cost of Equity with Asymmetric Risk Factors (August 2015). Financial Review, Vol. 50, Issue 3, pp. 435-457, 2015. Available at SSRN: https://ssrn.com/abstract=2631836 or http://dx.doi.org/10.1111/fire.12073

Vickie L. Bajtelsmit (Contact Author)

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

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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