Abstract
This study empirically analyze the effect of banks’ and insurance companies’
systematic risk and firm specific idiosyncratic risk factors on stock excess returns.
Traditional CAPM model is used to measure the market or systematic risk,
idiosyncratic risk exposure is measured by the idiosyncratic variables from Fama
and French (1993) three factor model. This study contributes with the dynamic
firm specific risk exposure, which is measured by Claim incurred ratio for
insurance companies and advances to deposits and borrowings for banks. The
objective of the study is to estimate the risk return dynamics of banking and
insurance sector of Pakistan. The results indicate that Market beta of banks close
to one indicates high volatility of banks due to low liquidity, high leverage and
strong regulatory influence. Insurance sectors’ firm specific operational
idiosyncratic risk factor (claim incurred ratio) has very limited explanation of
stock returns. Investor should consider the significance of explanatory power of
Size and value factor before making and investment in financial sector. Banks and
insurance companies with low operational management are highly expose to risk
of loss in the market. Operational performance is the important factor deriving
market returns. Findings of this study is original and can be generalized to
financial sectors. This study provide implication to investors about which risk
factors they should consider while making investment in banks and insurance
companies. Further operational performance should be considered as important
factor for stock excess returns
Dr. Abdul Haque, Adeel Nasir. (2016) Systematic and Idiosyncratic Risk Analysis of Banking and Insurance Sector of Pakistan, Abasyn Journal of Social Sciences, Volume-09, Issue-2.
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