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

Alexander Barinov, Jianren Xu and Steven W. Pottier

Journal of Risk & Insurance, 2020, vol. 87, issue 1, 213-245

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.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1111/jori.12267

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:87:y:2020:i:1:p:213-245

Ordering information: This journal article can be ordered from
http://www.wiley.com/bw/subs.asp?ref=0022-4367

Access Statistics for this article

Journal of Risk & Insurance is currently edited by Joan T. Schmit

More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().