Seminar 217, Risk Management: Asset Insurance Premium in the Cross-Section of Asset Synchronicity

Seminar: Risk Seminar | March 19 | 11 a.m.-12:30 p.m. | 1011 Evans Hall

 Speaker: Raymond Leung, UC Berkeley

 Consortium for Data Analytics in Risk

Any asset can use some portfolio of similar assets to insure against its own factor risks, even if the identities of the factors are unknown. A long position of an asset and a short position of this portfolio forms an asset insurance premium (AIP) that is different from the equity risk premium. We estimate the AIP by projecting a stock’s return onto the entire asset returns span using a machine learning method. Stocks least (most) synchronized with other stocks earn a monthly AIP of 0.976% (0.305%). Asset synchronicity is countercyclical: high consumption growth correlates with low average asset insurance premium.