An Assessment of the Borsa Istanbul Insurance Index Return Structure: The Markov Regime Switching Model

Abstract

Introduction: Studies on the insurance sector/companies have, in recent years, taken their place in literature at an increasing rate. Especially after the 2008 global financial crisis, the need for people to ensure their assets has structurally changed both the transaction volume and the yield structure of insurance sector. The increase in demand for insurance has also increased the appetite of investors to make an investment on this sector. The transaction volume of the insurance sector has increased year by year coupled with the number of insurance companies traded on the stock exchanges has started to increase in the same direction.

Aim: This chapter aims to determine the return structure of the Borsa Istanbul Insurance Index (XSGRT) based on daily closing values.

Method: Markedly with similar studies in the literature review, the authors determined that the Markov Regime Switching (MRS) model is the best-suited model for the current research. It was applied for the data set of XSGRT Index from 1997 to 2020.

Results: The result shows that XSGRT has three regimes named as expansion regime, normal regime and recession regime. Subsequently, it has been determined that the index generally attends to transition from the recession regime to the expansion regime and normal regime. This outcome is statistically significant at a 5% significance level and confirmed by backtesting results. Likewise, the duration of the recession regime is longer than the normal and expansion regime.

Conclusion: Despite the fact that the XSGRT has not yet completed its development compared to other main and sectoral indices, it is one of the indices that offer attractive earnings for investors. To put it differently, the desire of insurance companies to stay longer totally in the normal and expansion period and their immediate exit from the recession period provides them with a significant competitive advantage in contrast to other indices.

Originality/Value: This research contributes to the literature by providing additional evidence for existing studies using the longer duration of data set and applying the MRS model for Insurance Index. Best of our knowledge, it is the first study that examines the return structure of XSGRT based on its daily closing values from 1997 to 2020. In essence, investors can use the result of this study and compare it with other stock indices to make the accurate investment decision to maximise their welfare and return on their equity investments. The authors suggest that not only the return but also the regime structures of the invested shares (indices) should be taken into account for investment decisions.

Citation

Baykut, E. and Özen, E. (2022), "An Assessment of the Borsa Istanbul Insurance Index Return Structure: The Markov Regime Switching Model", Grima, S., Özen, E. and Romānova, I. (Ed.) Managing Risk and Decision Making in Times of Economic Distress, Part B (Contemporary Studies in Economic and Financial Analysis, Vol. 108B), Emerald Publishing Limited, Leeds, pp. 203-214. https://doi.org/10.1108/S1569-37592022000108B042