Estimation of Capital Beta and Cost of Capital: A Focus on Japanese Property-liability Insurance Companies and Lines of Business

Abstract

In this paper we estimate the equity beta and cost of capital of Japanese property liability insurance companies. For this, we obtain the overall equity beta and cost of capital for each company and then estimate the equity beta and cost of capital by the business lines. To obtain a company’s overall equity beta, we use the one-factor capital asset pricing model (CAPM) and the three-factor Fama-French (FF) model. To estimate each business line’s equity beta, we use the full-information industry beta (FIB) methodology. Econometric analysis reveals that the CAPM and FF models are well suited to estimating Japanese property-liability insurance companies’ the equity beta and cost of capital. Furthermore, by using the FIB methodology, we find that each the equity beta of each business line is different.