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Asset Pricing of Financial Insitutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry

Semir Ben Ammar (), Martin Eling and Andreas Milidonis ()

No 1516, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Insurance companies are important financial institutions exposed to natural and man-made disasters. We conduct a comprehensive examination of existing asset pricing models in the US insurance universe (1988-2013) and propose an insurance-specific asset pricing model. We find that extant asset pricing models fail to explain the cross-section of insurance stock returns. Instead, we provide evidence that the factors of the insurance-specific model (book-to-market ratio, short-term reversal, illiquidity, and cashflow volatility) are priced in the cross-section of property/liability insurance stocks. Our model takes into account both insurance-specific anomalies primarily related to the insurance business cycle and externalities imposed by catastrophe risk.

Keywords: Asset Pricing; Insurance Stocks; Multifactor Models; Anomalies; Cross-Section; Risk Factors (search for similar items in EconPapers)
JEL-codes: G12 G22 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2015-07
New Economics Papers: this item is included in nep-ger and nep-ias
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Handle: RePEc:usg:sfwpfi:2015:16