Weather Shocks to Insurance Stock Prices, and Volatility Persistence

摘要

Weather events such as tornadoes or hurricanes create liabilities for insurance companies. Insurance companies' profitability and stock prices are affected by these types of windstorms. In particular, the losses associated with wind related claims will adversely affect returns and may increase the associated investment risk of insurance companies. In this paper we use insurance stock prices to examine how windstorms affect the volatility of returns (figure 1). This paper examines the path of adjustment of volatility of insurance stock prices by using a general autoregressive conditional heteroskedastic model (GARCH) accounting for volatility shifts. Models that do not account for regime changes in conditional volatility may overestimate the persistence of the weather event on stock return risk. We use weekly data from 1/2/1990 to 6/5/2001 on an S&P insurance composite index, and compare to the overall stock market. The results of this paper are important to risk managers that wish to hedge risk caused by weather related events. Additionally, our findings will shed light on the operating efficiency of insurance firms.