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Alternative Models for Estimating the Cost of Equity Capital for Property/Casualty Insurers

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  • Lee, Alice C
  • Cummins, J David

Abstract

This paper estimates the cost of equity capital for Property/Casualty insurers by applying three alternative asset pricing models: the Capital Asset Pricing Model (CAPM), the Arbitrage Pricing Theory (APT), and a unified CAPM/APT model (Wei, 1988). The in-sample forecast ability of the models is evaluated by applying the mean squared error method, the Theil U2 (1966) statistic, and the Granger and Newbold (1978) conditional efficiency evaluation. Based on forecast evaluation procedures, the APT and Wei's unified CAPM/APT models perform better than the CAPM in estimating the cost of equity capital for the PC insurers and a combined forecast may outperform the individual forecasts. Copyright 1998 by Kluwer Academic Publishers

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  • Lee, Alice C & Cummins, J David, 1998. "Alternative Models for Estimating the Cost of Equity Capital for Property/Casualty Insurers," Review of Quantitative Finance and Accounting, Springer, vol. 10(3), pages 235-267, May.
    • Handle: RePEc:kap:rqfnac:v:10:y:1998:i:3:p:235-67
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    Cited by:

    1. Hong-Yi Chen & Cheng Few Lee & Wei-Kang Shih, 2020. "Technical, Fundamental, and Combined Information for Separating Winners from Losers," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 95, pages 3319-3365, World Scientific Publishing Co. Pte. Ltd..

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