Estimating the Cost of Equity Capital for Insurance Firms with Multi-Period Asset Pricing Models

Journal of Risk and Insurance, Forthcoming

38 Pages Posted: 14 Aug 2018

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Jianren Xu

California State University, Fullerton - Department of Finance

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: July 28, 2018

Abstract

Previous research on insurer cost of equity (COE) focuses on single-period asset pricing models. In reality, however, investment and consumption decisions are made over multiple periods, exposing firms to time-varying risks related to economic cycles and market volatility. We extend the literature by examining two multi-period models—the conditional CAPM (CCAPM) and the intertemporal CAPM (ICAPM). Using 29 years of data, we find that macroeconomic factors significantly influence and explain insurer stock returns. Insurers have counter-cyclical beta implying that their market risk increases during recessions. Further, insurers are sensitive to volatility risk (the risk of losses when volatility goes up), but not to insurance-specific risks, financial industry risks, liquidity risk, or co-skewness after controlling for other economy-wide factors.

Keywords: Cost of Equity, Multi-period Asset Pricing Models, Time-varying Risks, Volatility Risk, ICAPM, Conditional CAPM

JEL Classification: G12, G22, G31

Suggested Citation

Barinov, Alexander and Xu, Jianren and Pottier, Steven W., Estimating the Cost of Equity Capital for Insurance Firms with Multi-Period Asset Pricing Models (July 28, 2018). Journal of Risk and Insurance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3221988

Alexander Barinov (Contact Author)

University of California Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
585-698-7726 (Phone)

HOME PAGE: http://faculty.ucr.edu/~abarinov/

Jianren Xu

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-3786 (Phone)
706-542-4295 (Fax)

HOME PAGE: http://www.terry.uga.edu/insurance/pottier.html

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