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Catastrophes and insurance stocks : a benchmarking approach for measuring efficiency

journal contribution
posted on 2017-12-06, 00:00 authored by Jason WestJason West
This study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studiesare shown to be eliminated using the numeraire denominated returns approach.

History

Volume

6

Issue

1

Start Page

103

End Page

136

Number of Pages

34

eISSN

1748-5002

ISSN

1748-4995

Location

United Kingdom

Publisher

Cambridge University Press

Language

en-aus

Peer Reviewed

  • Yes

Open Access

  • No

External Author Affiliations

Griffith University; Not affiliated to a Research Institute;

Era Eligible

  • Yes

Journal

Annals of actuarial science.