—Based on a survey of 203 Insurance equities from European capital markets over the 2001-2014 period, this article analyses the role of idiosyncratic risk in the pricing of European insurance equities. The capital asset pricing model predicts that in equilibrium, investors should hold the market portfolio. As a result, investors should only be rewarded for carrying undiversifiable systematic risk and not for diversifiable idiosyncratic risk. The framework of Fama and MacBeth is employed. Regressions of the cross-section of expected equity excess returns on idiosyncratic risk and other firm characteristics such as beta, size, book-to-market equity (BE/ME), momentum, liquidity and co-skewness are performed.
The empirical models reveal that the largest part of total volatility is idiosyncratic and therefore firm specific in nature. Simple cross-correlations indicate that high beta, small size, high BE/ME, low momentum, low liquidity and high co-skewness equities have higher idiosyncratic risk.
—Insurance equities, cross-section, idiosyncratic risk, idiosyncratic volatility, EGARCH.
The author is with Universite de Toulouse, France (e-mail: firstname.lastname@example.org).
Cite: Hassen Raîs, "Idiosyncratic Risk and the Cross-Section of European Insurance Equity Returns," International Journal of Trade, Economics and Finance vol.7, no.6, pp. 229-237, 2016.