Stock return and market risk: A comparison between conventional insurance and takaful

Abstract

The focus of this study was to examine the relationship between market risk and stock return of different markets of insurance, namely, conventional insurance and takaful. In order to estimate the market better with care, the variance of the stock return was examined as well. Earlier studies in determining the relationship between risk and return of insurer stock return employed the assumption that variance is constant over time. However, empirical evidence rejected the notion of a constant better and pointed to changing risk premium and returns variability over time. As a consequence, this study employed CAPM-GARCH (1,1) in order to estimate the market return coefficient and took the time varying volatility into consideration. Data for monthly stock return for Syarikat Takaful Malaysia as representative of the Takaful market, Hong Leong Finance Group as representative of the conventional insurance market and Kuala Lumpur Composite Index as market return were obtained from Bursa Malaysia. The time period of study was from February 1997 to February 2008. The results showed that there are clusters of volatile movements in both companies stock return with intervening periods of relative stability. This implied that GARCH is the appropriate model for insurance stock return. The results also proved that for market movements, the effect varies across these two firms. These results were expected since each company will have a different exposure towards the fluctuation of market movements. Key words: risk, return, CAPM-GARCH, conventional insurance, takaful