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Estimation of Capital Beta and Cost of Capital: A Focus on Japanese Property-liability Insurance Companies and Lines of Business

Author

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  • Shirasu Yoko

    (Aoyama Gakuin University, Japan)

  • Komoribayashi Katsuya

    (Waseda University, Japan)

  • Moridaira Soichiro

    (Waseda University, Japan)

Abstract

In this paper we estimate the equity beta and cost of capital of Japanese property liability insurance companies. For this, we obtain the overall equity beta and cost of capital for each company and then estimate the equity beta and cost of capital by the business lines. To obtain a company's overall equity beta, we use the one-factor capital asset pricing model (CAPM) and the three-factor Fama-French (FF) model. To estimate each business line's equity beta, we use the full-information industry beta (FIB) methodology. Econometric analysis reveals that the CAPM and FF models are well suited to estimating Japanese property-liability insurance companies' the equity beta and cost of capital. Furthermore, by using the FIB methodology, we find that each the equity beta of each business line is different.

Suggested Citation

  • Shirasu Yoko & Komoribayashi Katsuya & Moridaira Soichiro, 2009. "Estimation of Capital Beta and Cost of Capital: A Focus on Japanese Property-liability Insurance Companies and Lines of Business," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(2), pages 1-18, April.
    • Handle: RePEc:bpj:apjrin:v:3:y:2009:i:2:n:5
    DOI: 10.2202/2153-3792.1040
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    References listed on IDEAS

    as
    1. Michael C. Ehrhardt & Yatin N. Bhagwat, 1991. "A Full-information Approach for Estimating Divisional Betas," Financial Management, Financial Management Association, vol. 20(2), Summer.
    2. Stewart C. Myers, 1972. "The Application of Finance Theory to Public Utility Rate Cases," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 58-97, Spring.
    3. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    4. J. David Cummins & Richard D. Phillips, 2005. "Estimating the Cost of Equity Capital for Property‐Liability Insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(3), pages 441-478, September.
    5. Fuller, Russell J & Kerr, Halbert S, 1981. "Estimating the Divisional Cost of Capital: An Analysis of the Pure-Play Technique," Journal of Finance, American Finance Association, vol. 36(5), pages 997-1009, December.
    6. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 1-40, January.
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    Cited by:

    1. YASUDA, Yukihiro & 安田, 行宏, 2016. "Impacts of Deregulation on Property and Casualty Insurers' Pricing and Risk Taking: Empirical Evidence in Japan," Working Paper Series G-1-10, Hitotsubashi University Center for Financial Research.

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