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Consumption-Based Asset Pricing in Insurance Markets: Yet Another Puzzle?
Journal
Journal of Risk and Insurance
Series
Working Papers on Risk Management and Insurance
ISSN
0022-4367
ISSN-Digital
1539-6975
Type
journal article
Date Issued
2019-09-01
Author(s)
Abstract
Although insurance is the typical textbook example for an asset that negatively correlates with consumption, the suitability of the classical consumption‐based asset pricing model with power utility to explain historical premiums and claims has not yet been tested. We fill this gap by fitting it to property–casualty market data for Australia, Italy, the Netherlands, the United States, and Germany. In doing so, we reveal yet another asset pricing anomaly. More specifically, the consumption‐based model implies even larger relative risk aversion coefficients in the insurance sectors than in the equity markets of the aforementioned countries. To solve this puzzle, we draw on the loss aversion and narrow framing approach by Barberis, Huang, and Santos (2001) as well as the second‐degree expectation dependence framework by Dionne, Li, and Okou (2015), with encouraging results.
Language
English
HSG Classification
contribution to scientific community
Refereed
No
Publisher
Blackwell
Publisher place
Malden, Mass. [u.a]
Volume
86
Number
3
Start page
629
End page
661
Subject(s)
Division(s)
Eprints ID
245114