Crisis Sentiment in the U.S. Insurance Sector

Abstract

We use Internet search volume data to measure idiosyncratic and market‐wide crisis sentiment to explain insurer stock return volatility. We find that market‐level crisis sentiment was a significant predictor of stock return volatility of U.S. insurers between 2006 and 2010. Higher levels of crisis sentiment are associated with higher levels of price uncertainty. This effect is strongest for insurers with less exposure to the adverse effects of the financial crisis. Further, crisis sentiment also affects the cross‐section of movements in insurer stock prices. Our results imply that investors exited insurer stocks mainly due to crisis sentiment rather than a rational assessment of the insurers’ actual exposure to the crisis.

Stock return drivers: a mix of reasons and emotions

“…Bijl et al (2016) find that high Google search volumes predict high returns for the first one-to-two weeks, with subsequent price reversal and high Google search volumes leading to negative returns. Irresberger et al (2017) use GSVI for measuring idiosyncratic and market-wide crisis sentiment to explain insurer stock-return volatility. Nikkinen and Peltomaki (2020) propose that GSVI becomes a tool applied for financial market research.…”

“…They find that the global financial crisis is a game-changer, and there is an intensive response during the period of financial turmoil. Several studies, such as those of De Bondt and Thaler (2000), Baker and Wurgler (2007) and Irresberger et al (2017), find that stock markets have many dramatic events that severely force rapid change in them. To consider these extraordinary events, we concentrate on the two recent financial crises — the US subprime mortgage crisis (2007–2009) and the European debt crisis (2011–2013) — to find the difference in explanatory power between rationality and irrationality in each economic shock.…”