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Did federal funds target rate changes affect the market value of insurance compagnies?

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  • DE CEUSTER, Marc J.K.
  • LI, Jie
  • ZHANG, Hairui
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Abstract

In this paper, we study the sensitivity of insurance companies’ stock returns with respect to expected and unexpected changes in the Federal funds target rate over the period 1988-2007. We confirm Bernanke and Kuttner (2005) that, as stocks in general, insurance stock returns are only sensitive to the unexpected changes in the Federal funds target rate, but not to the expected ones. However, market-adjusted stock returns do only show a reaction for the non-life insurers. For life insurers, there does not seem to be an industry specific effect on their market value. This can be explained by the business models life and nonlife insurers adopt.

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File URL: https://www.uantwerpen.be/images/uantwerpen/container1244/files/TEW%20-%20Onderzoek/Working%20Papers/RPS/2012/RPS-2012-027.pdf
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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2012027.

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Length: 24 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:ant:wpaper:2012027

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Keywords: Interest rate shocks; Insurance companies; Federal funds target rate changes;

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  1. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series 2004-16, Board of Governors of the Federal Reserve System (U.S.).
  2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  3. Haiyan Yin & Jiawen Yang & William C. Handorf, 2010. "State Dependency Of Bank Stock Reaction To Federal Funds Rate Target Changes," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 33(3), pages 289-315.
  4. Bento J. Lobo, 2002. "Interest Rate Surprises and Stock Prices," The Financial Review, Eastern Finance Association, vol. 37(1), pages 73-91, 02.
  5. Lee, Jae Ha & Stock, Duane R., 2000. "Embedded options and interest rate risk for insurance companies, banks and other financial institutions," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(2), pages 169-187.
  6. Elijah Brewer & James M. Carson & Elyas Elyasiani & Iqbal Mansur & William L. Scott, 2007. "Interest Rate Risk and Equity Values of Life Insurance Companies: A GARCH-M Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 401-423.
  7. Stone, Bernell K., 1974. "Systematic Interest-Rate Risk in a Two-Index Model of Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(05), pages 709-721, November.
  8. Doherty, Neil A. & Kang, Han Bin, 1988. "Interest rates and insurance price cycles," Journal of Banking & Finance, Elsevier, vol. 12(2), pages 199-214, June.
  9. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
  10. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  11. David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
  12. Giliberto, Michael, 1985. "Interest Rate Sensitivity in the Common Stocks of Financial Intermediaries: A Methodological Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(01), pages 123-126, March.
  13. William Poole & Robert H. Rasche, 2003. "The impact of changes in FOMC disclosure practices on the transparency of monetary policy: are markets and the FOMC better "synched"?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-10.
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