Estimating the Cost of Equity Capital for Insurance Firms with Multiperiod Asset Pricing Models

33 Pages Posted: 28 May 2020

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Jianren Xu

University of North Texas

Steven W. Pottier

affiliation not provided to SSRN

Date Written: March 2020

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 multiperiod models—the conditional capital asset pricing model (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 countercyclical 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 coskewness after controlling for other economy‐wide factors.

Suggested Citation

Barinov, Alexander and Xu, Jianren and Pottier, Steven W., Estimating the Cost of Equity Capital for Insurance Firms with Multiperiod Asset Pricing Models (March 2020). Journal of Risk and Insurance, Vol. 87, Issue 1, pp. 213-245, 2020. Available at SSRN: https://ssrn.com/abstract=3610308 or http://dx.doi.org/10.1111/jori.12267

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

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Steven W. Pottier

affiliation not provided to SSRN

No Address Available

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