Decisions in Economics and Finance最新文献

We show, through a Linear Algebra approach, that a general deterministic cash-flow stream admits a given Internal Rate of Return (irr, either constant or time-varying) if, and only if, it can be replicated by a suitable portfolio of bonds, each with yield to maturity equal to that same irr. Five particular replicating portfolios are examined, including and generalizing other representations known from the the literature, which allow for a unified, irr-based, interpretation of apparently diverse objects. Considering the amortization of a loan as a particular case, further equivalences are found and lead to some original consideration.

In defined contribution pension schemes the member bears the investment risk and her main concern is to obtain an inadequate fund at retirement. To address inadequacy risk, flexibility is often given to the member to pay additional voluntary contributions (AVCs) into the fund. In many countries the AVC schemes allow members of the workplace pension plan to increase the amount of retirement benefits by paying extra contributions. In this paper, we define a target-based optimization problem where the member of an AVC scheme can choose at any time the investment strategy and the AVCs to the fund. In setting the problem, the member faces a trade-off between the importance given to the stability of payments during the accumulation phase and the achievement of the desired annuity at retirement. We derive closed-form solutions via dynamic programming and prove that (i) the optimal fund never reaches the target final fund, (ii) the optimal amount invested in the risky asset is positive, and (iii) the optimal AVC is higher than the target one. We run numerical simulations to allow for different member’s preferences, and perform sensitivity analyses to assess the controls’ robustness.

We propose a model with economic and environmental domains that interact with each other. The economic sphere is described by a Solow growth model, in which productivity is not exogenous but negatively affected by the stock of pollution that stems from the production process. A regulator can charge a tax on production, and the resources collected from taxation are used to reduce pollution. The resulting model consists of a two dimensional discrete dynamical system, and we study the role of taxation from both a static and a dynamical point of view. The focus is on the determination of the conditions under which taxation has a positive effect on the environment and leads to economic growth. Moreover, we show that a suitable environmental policy can allow recovering both local and global stability of the steady states. On the contrary, we show that, if the policy is not adequate, the system can exhibit endogenous oscillating and chaotic behavior and multistability phenomena.

I study the exact percentage price reaction (in absolute value) to changes in the short rate for long-lived assets in a tractable long-run risk equilibrium model with fluctuating expected growth rates. Calibration reveals that, under time-additive expected utility, perpetuities with constant coupons exhibit a larger effective duration than the absolute value of the stock price logarithmic derivative due to a mild positive comovement between short rates and expected dividend growth. Conversely, under Epstein-Zin preferences with unit elasticity of intertemporal substitution, the perpetuity’s effective duration is smaller due to a pronounced positive comovement between short rates and expected dividend growth. My findings suggest that strong persistence in fundamentals contributes to non-linearities in the equilibrium log prices of long-lived assets. (JEL Classification Code: G12). Keywords: equilibrium short rate, long-run risk, effective duration, stock pricing, perpetuity/consol pricing.

In this study, we provide a simple one period mean-field-games setting for the joint optimal trading problem for electricity producers in the electricity markets. Based on the Markowitz mean-variance approach from stock trading, we consider a decision problem of an electricity provider when determining the optimal fractions of production that should be traded in the day-ahead and in the intraday markets. Moreover, all such providers are related by a ranking criterion and each one wants to perform as good as possible in this ranking. We first start with a simple model where only the price risk in the intraday market is present and subsequently extend the problem to the cases involving either production and/or demand uncertainty. The key technique is to reduce the optimality conditions to a first order non-linear ordinary differential equation. We will illustrate our findings by various numerical examples. Our findings will in particular be important for electricity producers using renewable resources.

This study addresses a research gap in quantitative modeling framework and scenario analysis for the risk management of stable value fund wraps, a crucial segment of the U.S. financial market with over USD $400 billion in assets. In this paper, we present an asset–liability model that encompasses an innovative approach to modeling the assets of fixed-income funds coupled with a liability model backed by empirical analysis on a unique data set covering 80% of the stand-alone plan sponsor market, contrasting with models based solely on regular deterministic cash flows and interest rate differences. Our model identifies and analyzes two critical risk scenarios from the insurer’s perspective: inflationary and yield spike. Our approach demonstrates that the tail risk of wraps, used as an economic capital measure, is sensitive to characteristic parameters of the fund, such as the duration, portfolio composition and credit quality of assets. This finding significantly differs from U.S. regulatory approaches like the NAIC’s, which often result in a zero capital requirement. These findings reveal limitations in current actuarial risk and profitability metrics for U.S. insurers and argue that a more sophisticated risk model reproducing the two critical scenarios is necessary.

This note in the Milestones series is dedicated to the paper “A Behavioral Model of Rational Choice”, written by Herbert Simon and published in 1955 on the Quarterly Journal of Economics.

The aim of this paper is to deepen the study of solution methods for rank-two nonconvex problems with polyhedral feasible region, expressed by means of equality, inequality and box constraints, and objective function in the form of (phi left( c^Tx+c_0,frac{d^Tx+d_0}{b^Tx+b_0}right) ) or (bar{phi }left( frac{bar{c}^Ty+bar{c}_0}{a^Ty+a_0}, frac{d^Ty+d_0}{b^Ty+b_0}right) ). These problems arise in bicriteria programs, quantitative management science, data envelopment analysis, efficiency analysis and performance measurement. Theoretical results are proved and applied to propose a solution algorithm. Computational results are provided, comparing various splitting criteria.

Abstract

Traditional stochastic mortality models tend to extrapolate, to focus on identifying trends in mortality without explaining them. Those that do link mortality with other variables usually limit themselves to GDP. This article presents a novel stochastic mortality model that incorporates a wide range of variables related to economic, environmental and lifestyle factors to predict mortality. The model uses principal components derived from these variables, extending the Niu and Melenberg (Demography 51(5):1755–1773, 2014) model to variables other than GDP, and is applied to 37 countries from the Human Mortality Database. Model fit is superior to the Lee–Carter model for 18 countries. The forecasting accuracy of the proposed model is better than that of the Niu–Melenberg model for half of the countries analyzed under various jump-off years. The model highlights the importance of economic prosperity and healthy lifestyle choices in improving lifespan, while the effect of environmental variables is mixed. By clarifying the specific contributions of different factors and thus making trade-offs explicit, the model is designed to facilitate scenario building and policy planning.

The evolution of digital technologies is reshaping consumer habits and needs, driving process automation, and giving rise to innovative business models like Insurtech. Peer-to-peer (P2P) insurance is emerging as part of this trend. P2P involves purchasing an insurance policy by sharing the risk with a group of peers. This group transparently monitors real-time savings and tracks claims filed by its members. At the policy’s expiration, if the actual risk is lower than anticipated, the peers receive a partial refund of their premium. This paper introduces a model to determine the entry price in a broker-based P2P scheme using a cooperative game approach. We employ the Shapley Value method to distribute the risk among participants. Numerical examples are included for illustration and discussion.