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

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  • Ben Ammar, Semir

    ()

  • Eling, Martin

    ()

  • Milidonis, Andreas

    ()

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.

Suggested Citation

  • Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2015. "Asset Pricing of Financial Insitutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry," Working Papers on Finance 1516, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2015:16
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1516.pdf
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    Keywords

    Asset Pricing; Insurance Stocks; Multifactor Models; Anomalies; Cross-Section; Risk Factors;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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