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Market Risk, Interest Rate Risk, and Interdependencies in Insurer Stock Returns: A System‐GARCH Model

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  • James M. Carson
  • Elyas Elyasiani
  • Iqbal Mansur

Abstract

We examine market risk, interest rate risk, and interdependencies in returns and return volatilities across three insurer segments within a System‐GARCH framework. Three main results are obtained: market risk is greatest for accident and health (A&H) insurers, followed by life (Life) and property and casualty (P&C) insurers; interest rate sensitivity is negative and greatest for Life insurers; and interdependencies in returns are significant with the magnitude being strongest between P&C and A&H insurers. The implication is that greatest diversification benefits arise between Life and the other segments of the insurance industry. Market risk and interest rate risk for diversified firms are smaller than those for nondiversified firms for both product and geographic diversification.

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  • James M. Carson & Elyas Elyasiani & Iqbal Mansur, 2008. "Market Risk, Interest Rate Risk, and Interdependencies in Insurer Stock Returns: A System‐GARCH Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 873-891, December.
    • Handle: RePEc:bla:jrinsu:v:75:y:2008:i:4:p:873-891
    DOI: 10.1111/j.1539-6975.2008.00289.x
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    References listed on IDEAS

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    1. Elyasiani, Elyas & Mansur, Iqbal & Pagano, Michael S., 2007. "Convergence and risk-return linkages across financial service firms," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1167-1190, April.
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    1. J. David Cummins & Mary A. Weiss, 2009. "Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk‐Transfer Solutions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 493-545, September.
    2. 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.
    3. Elyas Elyasiani & Sotiris K. Staikouras & Panagiotis Dontis-Charitos, 2016. "Cross-Industry Product Diversification and Contagion in Risk and Return: The case of Bank-Insurance and Insurance-Bank Takeovers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 681-718, September.
    4. A. Seetharaman & Vikas Kumar Sahu & A. S. Saravanan & John Rudolph Raj & Indu Niranjan, 2017. "The Impact of Risk Management in Credit Rating Agencies," Risks, MDPI, vol. 5(4), pages 1-16, September.
    5. Zhang, Xi & Li, Jian, 2018. "Credit and market risks measurement in carbon financing for Chinese banks," Energy Economics, Elsevier, vol. 76(C), pages 549-557.
    6. Greg Niehaus & Jannes Rauch & Sabine Wende, 2019. "Regulation and the connectedness of insurers to the banking sector: International evidence," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(4), pages 393-420, December.
    7. Kyal Berends & Robert McMenamin & Thanases Plestis & Richard J. Rosen, 2013. "The sensitivity of life insurance firms to interest rate changes," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 37(Q II), pages 47-78.
    8. Elyas Elyasiani & Elena Kalotychou & Sotiris Staikouras & Gang Zhao, 2015. "Return and Volatility Spillover among Banks and Insurers: Evidence from Pre-Crisis and Crisis Periods," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(1), pages 21-52, August.
    9. Elyas Elyasiani & Iftekhar Hasan & Elena Kalotychou & Panos K. Pouliasis & Sotiris K. Staikouras, 2020. "Banks’ equity performance and the term structure of interest rates," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 29(2), pages 43-64, May.
    10. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
    11. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2018. "The cross-section of expected stock returns in the property/liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 292-321.
    12. Courtney B. Baggett & Cassandra R. Cole & George Crowley & E. Tice Sirmans, 2020. "Spillover effects of increased health insurance enrollment on workers’ compensation insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(1), pages 53-74, March.
    13. Daniel Hartley & Anna L. Paulson & Richard J. Rosen, 2016. "Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K," Working Paper Series WP-2016-2, Federal Reserve Bank of Chicago.
    14. Robert N. Killins & Haiwei Chen, 2022. "The impact of the yield curve on the equity returns of insurance companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1134-1153, January.
    15. Marcelo Scherer Perlin & Mauro Mastella & Daniel Francisco Vancin & Henrique Pinto Ramos, 2021. "A GARCH Tutorial with R," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 25(1), pages 200088-2000.
    16. Tyler K. Jensen & Robert R. Johnson & Michael J. McNamara, 2019. "Funding conditions and insurance stock returns: Do insurance stocks really benefit from rising interest rate regimes?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(4), pages 367-391, December.
    17. Schaper, Philipp, 2017. "Under pressure: how the business environment affects productivity and efficiency of European life insurance companiesAuthor-Name: Eling, Martin," European Journal of Operational Research, Elsevier, vol. 258(3), pages 1082-1094.

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