stockmarket volatility

8/12/2019 Stockmarket Volatility

1/39

Reading List

Stock Market Volatility

2009-2012

Institute and Faculty of Actuaries

December 2012

Compiled by Scott McLachlan


2/39

ii


3/39

iii

INSTITUTE AND FACULTY OF ACTUARIES

LIBRARY SERVICES

Maclaurin House

18 Dublin Street

EDINBURGH EH1 3PP

Tel 0131 240 1311

Fax 0131 240 1313

Staple Inn Hall

High Holborn

LONDON WC1V 7QJ

Tel 020 7632 2114

Fax 020 7632 2111

e-mail:[email protected]

**********
mailto:[email protected]:[email protected]:[email protected]:[email protected]


4/39

iv

THE LIBRARIES

The libraries of the Institute and Faculty of Actuaries offer a wide selection of resources, covering actuarial

science, mathematics, statistics, finance, investment, pensions, insurance, healthcare, social policy,

demography, business and risk management. Our extensive range of online resources are available to you

wherever you are.

The Libraries reserve the right to restrict the availability of any service to members of the Institute and Faculty of

Actuaries only.

ACCESS

The Libraries are open to all members of the Institute and Faculty of Actuaries. Opening hours are 9:00 to 17:00

Monday to Friday; the libraries are closed on public holidays. If you are planning a visit, please let us know so

we can ensure someone is available to welcome you.

Online access to electronic resources is available through Athens:www.openathens.net

Members are entitled to a free account. For an account pleaseemailthe libraries, quoting your ARN number.

LENDING

We can post books to members and other approved borrowers in the UK and overseas. We hold multiple

copies of popular titles. If an item is not in stock we will usually buy it or obtain it from another library.

PHOTOCOPYING

We can post, fax or email single copies of periodical articles and extracts from books, subject to copyright

regulations.

ENQUIRIES

We can search for information, statistics and hard-to-trace references. We aim to respond within 24 hours.

ONLINE CATALOGUE

The online catalogue is available at:http://actuaries.soutron.net

READING LISTS

We produce topical lists of recent publications which you can download from the libraries area of the website.

We can compile customized lists on request ([email protected])or you can search thelibrary

catalogue.

THE HISTORICAL COLLECTION

The Institute's collection of historical material is housed at Staple Inn. This collection comprises all books

published before 1870, those of historical interest published 1870 - 1959 and historical studies published

subsequently. It also includes full sets of the Journal of the Institute of Actuaries, Journal of the Staple Inn

Actuarial Society, Transactions of the Faculty of Actuaries, Transactions of the International Congress of

Actuaries, the journals of many overseas actuarial bodies, copies of tuition material and a reference collection.Opening hours are 9.00am to 5.00pm. Prospective visitors are advised to telephone in advance.

PUBLICATIONS SHOP

We stock all publications issued by the Institute and Faculty of Actuaries, including Core Reading, Formulae

and tablesand titles from the list of suggested further reading for the CT and SA exams. We offer discounts on

a range of books and calculators approved for the professions exams. You can place orders and find news of

the latest discounts athttp://www.actuaries.org.uk/research-and-resources/eshop

FEES FOR SERVICES

There may be a fee for some services. Please check the libraries pages on the website at:

www.actuaries.org.uk/research-and-resources/pages/borrowing
http://www.openathens.net/http://www.openathens.net/http://www.openathens.net/mailto:[email protected]?subject=Athens%20accountmailto:[email protected]?subject=Athens%20accountmailto:[email protected]?subject=Athens%20accounthttp://actuaries.soutron.net/http://actuaries.soutron.net/http://actuaries.soutron.net/mailto:[email protected]:[email protected]:[email protected]://actuaries.soutron.net/http://actuaries.soutron.net/http://actuaries.soutron.net/http://actuaries.soutron.net/http://www.actuaries.org.uk/research-and-resources/eshophttp://www.actuaries.org.uk/research-and-resources/eshophttp://www.actuaries.org.uk/research-and-resources/eshophttp://www.actuaries.org.uk/research-and-resources/pages/borrowinghttp://www.actuaries.org.uk/research-and-resources/pages/borrowinghttp://www.actuaries.org.uk/research-and-resources/pages/borrowinghttp://www.actuaries.org.uk/research-and-resources/eshophttp://actuaries.soutron.net/http://actuaries.soutron.net/mailto:[email protected]://actuaries.soutron.net/mailto:[email protected]?subject=Athens%20accounthttp://www.openathens.net/


5/39

v

ContentsANALYSIS.......................................................................................................................................................... 1

ANNUITIES....................................................................................................................................................... 1

ASSET ALLOCATION........................................................................................................................................ 2

ASSET LIABILITY MATCHING......................................................................................................................... 2

ASSETS.............................................................................................................................................................. 2

AUSTRALIA....................................................................................................................................................... 2

AUTOMOBILE INDUSTRY................................................................................................................................ 3

BENCHMARKING............................................................................................................................................. 3

BOND PRICES................................................................................................................................................... 3

BUSINESS CYCLES............................................................................................................................................ 3

CAPITAL ASSET PRICING MODEL.................................................................................................................. 4

CAPITAL CHOICE............................................................................................................................................. 4

CHANNELS OF DISTRIBUTION....................................................................................................................... 4

CHILE................................................................................................................................................................ 4

CONTRIBUTION RATE..................................................................................................................................... 5

DEFINED BENEFIT SCHEMES......................................................................................................................... 5

DERIVATIVES................................................................................................................................................... 5

DISABILITY INSURANCE................................................................................................................................. 6

EMERGING MARKETS..................................................................................................................................... 6

EMPLOYMENT................................................................................................................................................. 6

EQUITIES.......................................................................................................................................................... 7

EVALUATION.................................................................................................................................................... 7

EXCHANGE TRADED FUNDS (EFTS).............................................................................................................. 7

FINANCIAL CRISES.......................................................................................................................................... 7

FINANCIAL MARKETS..................................................................................................................................... 9

FINLAND......................................................................................................................................................... 10

GERMANY....................................................................................................................................................... 10

GOVERNMENT............................................................................................................................................... 10

GUARANTEES................................................................................................................................................. 10

HEDGE FUNDS................................................................................................................................................ 11

HOUSING MARKET........................................................................................................................................ 11

INDEXES......................................................................................................................................................... 12


6/39

vi

INDIA.............................................................................................................................................................. 12

INSURANCE.................................................................................................................................................... 12

INSURANCE BROKING................................................................................................................................... 13

INVESTMENT................................................................................................................................................. 13

INVESTMENT ATTITUDES............................................................................................................................ 13

LABOUR MARKET.......................................................................................................................................... 14

LABOUR SUPPLY............................................................................................................................................ 14

LAW................................................................................................................................................................. 14

LONG TERM CARE COVER............................................................................................................................ 14

LOSSES............................................................................................................................................................ 15

MACROECONOMICS....................................................................................................................................... 15

MARKET STRUCTURE................................................................................................................................... 15

MARKET TRENDS.......................................................................................................................................... 15

MATHEMATICAL MODELS............................................................................................................................ 16

MODELLING................................................................................................................................................... 16

MONETARY ECONOMICS.............................................................................................................................. 16

MORTGAGE INDEMNITY INSURANCE......................................................................................................... 17

MORTGAGES................................................................................................................................................... 17

MUTUAL FUNDS............................................................................................................................................. 17

OPTION PRICING........................................................................................................................................... 17

PENSION REFORM......................................................................................................................................... 18

PENSIONS....................................................................................................................................................... 18

PORTFOLIO INVESTMENT............................................................................................................................ 19

PORTFOLIO MANAGEMENT......................................................................................................................... 19

PORTFOLIO PERFORMANCE........................................................................................................................ 19

PRICE COMPETITION.................................................................................................................................... 20

PRICING.......................................................................................................................................................... 20

PRIVATE MEDICAL INSURANCE.................................................................................................................. 20

RATING........................................................................................................................................................... 21

REFORM.......................................................................................................................................................... 21

REGULATION................................................................................................................................................. 21

RETURNS........................................................................................................................................................ 23

RISK................................................................................................................................................................. 23

RISK AVERSION............................................................................................................................................. 24RISK CHARACTERISTICS............................................................................................................................... 25


7/39

vii

SAVING............................................................................................................................................................ 25

SOCIAL INSURANCE...................................................................................................................................... 25

SOCIAL POLICY.............................................................................................................................................. 25

STANDARDS AND SPECIFICATIONS............................................................................................................ 26

STOCHASTIC PROCESSES.............................................................................................................................. 26

STOCK CONTROL........................................................................................................................................... 26

STOCK MARKET............................................................................................................................................. 27

SYSTEMIC RISK.............................................................................................................................................. 28

UNEMPLOYMENT.......................................................................................................................................... 29

UNITED STATES............................................................................................................................................. 29

VALUATION.................................................................................................................................................... 30

VALUE-AT-RISK (VAR).................................................................................................................................. 30

VOLATILITY.................................................................................................................................................... 31


8/39

1

ANALYSIS

Pension plan solvency and extreme market movements: a regime switching approach : A background paper for discussion.Freeman, Mark; Clacher, Iain; Hillier, David; Kemp, Malcolm H D; Abourashschi, Niloufar; Zhang, Qi (2012). - London: Institute and

Faculty of Actuaries, 2012. - 17 pages. [RKN: 43517]Shelved at: ifp 06/12

The global credit crunch has forcefully highlighted the impact of extreme market events on both the asset and liability side of apension plan's balance sheet. Over the course of 2008 there were severe falls in global stock markets because of the financialcrisis and, in particular, the failure of Lehman Brothers. However, the dramatic collapse in pension plan solvency that wasobserved in early 2009 was not caused solely by the signicant falls in the value of pension plan assets that had occurred. In March2009 quantitative easing pushed bond yields signicantly lower, thereby increasing the present value of defined benefit pensionliabilities. As a consequence, the net funding position of defined benefit pension plans in the UK swung dramatically from a surplusof 149.2bn in June 2007 to a deficit of 208.6bn in March 2009, back to a surplus of 35.5bn in February 2011 and then back to adeficit again of 206.2bn in March 2012. These turbulent conditions highlighted the need to capture extreme market movements inthe modelling of future pension fund solvency risk. Traditional models of asset returns assume that the statistical parameters thatdrive asset returns and interest rate changes remain constant over time. In these `one state' models, stock markets might produceaverage returns of approximately 10% a year every year. It has recently been recognized that average returns, the variance ofreturns and the covariances between returns to different asset classes can be more accurately modelled using parameters thatswitch between more than one set of values. As a result, these multi-state' models are gaining in popularity as the benefits ofapplying such models to practical problems, such as asset allocation decisions, are becoming increasingly recognized in a

number of fields. In particular, these models can capture rare, but extreme, market events, the time-variation in asset returnvolatility and the "fat-tailed" nature of stock returns. We therefore model the future solvency of defined-benefit pension plans usingregime switching models and compare the outcomes with those of traditional one-state models. Our results show that futureprojections of pension plan solvency are highly model-dependent. In particular, if discount rates are assumed to remain constant,then regardless of the choice of model (one-state or multi-state) the probability of future deficits is dramatically under-statedcompared to forecasts where a stochastic discount rate process is used. Moreover, our results suggest that by allowing forleptokurtosis in asset returns the probability of a future deficit is much greater. However, it is also important to note that allowing forcorrelations between asset returns and the discount rate signifi_cantly reduces the assessed probability of underfunding in thefuture.http://www.actuaries.org.uk/sites/all/files/Print%20version%20Freeman%20et%20al%20080512vps.pdf

The relevance of emerging markets in portfolio diversification : Analysis in a downside risk framework. Kumar, S S S PalgraveMacmillan, [RKN: 45746]Shelved at: Per: J.Asset Man (Oxf)Journal of Asset Management(2012)13 (3) : 162-169.

During the global financial crisis of 2008, emerging markets declined almost to the same extent as developed markets, casting

doubts on their ability to provide diversification benefits. This article aims to assess the benefit of adding the volatility index, as anasset class, instead of emerging markets to the domestic portfolios of US and UK investors. The results show that for both US andUK investors, portfolios comprising volatility-based contracts outperform emerging markets portfolios on the basis of portfolioperformance metrics, such as the Sortino ratio, the Adjusted Sharpe ratio and the Stutzer index. The results imply that USinvestors seeking risk reduction have an alternative investment opportunity in volatility-based contracts rather than investing inemerging markets. Investing in emerging markets is fraught with political and exchange rate risks, whereas investing in the VIX isfree of these risks. Currently, there are no exchange-traded products on the FTSE 100 VIX. This study makes a case forintroducing them.

ANNUITIES

A Summary and Update of Developing Annuities Markets : The Experience of Chile. Rocha, Roberto; Rudolph, Heinz P (2010).

World Bank, 2010. - 45 pages. [RKN: 72637]The rapid growth of the market for retirement products in Chile has its origins in the pension reform that was implemented in 1981.But the successful development of an active annuity market also reflects many other factors. This paper summarizes and updatesan earlier longer study on the development of the Chilean annuity market. The update focuses on the numerous changes thatwere introduced in 2008. The most striking aspect of the Chilean experience is the very high rate of annuitization. This has beenlinked to the restrictions that have been applied to lump-sum withdrawals, the offer of inflation-protected annuities, and the robustprudential regulation of providers. But the level of annuitization has also been supported by the annuitization incentives providedto early retirees and the influence of brokers and sales agents. The recent regulatory changes have weakened the impact of th elast two factors, while strengthening the demand for annuities at normal retirement.http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2010/06/01/000158349 20100601090117/Rendered/PDF/WPS5325.pdf


9/39

2

ASSET ALLOCATION

What is the impact of stock market contagion on an investors portfolio choice?.Branger, Nicole; Kraft, Holger; Meinerding,Christoph - 19 pages. [RKN: 72377]Shelved at: Per: IME (Oxf)Insurance: Mathematics & Economics(2009)45 (1) : 94-112.

Available from Athens: ScienceDirectStocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of

crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on theportfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantlyadjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span betweenjumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoringcontagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utilitylosses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not t radederivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors security demands, since itreduces their ability to diversify their portfolios.Keywords: Asset allocation; Jumps; Contagion; Model riskhttp://www.openathens.net

ASSET LIABILITY MATCHING

Market consistency. Model calibration in imperfect markets. Kemp, Malcolm H D (2009). - Chichester: Wiley, 2009. - xxv,350pages. [RKN: 39382]Shelved at: CPFB (Lon) Shelved at: 332.041 KEM

Achieving market consistency can be challenging, even for the most established finance practitioners. In "Market Consistency:Model Calibration in Imperfect Markets", leading expert Malcolm Kemp shows readers how they can best incorporate marketconsistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the bookexplores how risk management and related disciplines might develop as fair valuation principles become more entrenched infinance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio constructionmodels to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used,what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains whymarket consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedgingparameters, and provides solutions to even the most complex problems.

The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvencyand other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthinessof governments is no longer undoubted; and, it explores when practitioners should focus most on market consistency and when

their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulationand risk management within different parts of the financial services industry, identifying how and why market consistency is key tothese topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds maynot be the same as for other financial market participants such as banks and asset managers

ASSETS

Retirement Security and the Stock Market Crash: What Are the Possible Outcomes?.Butrica, Barbara A.; Smith, Karen E; Toder,Eric J (2009). - Chestnut Hill: Center for Retirement Research at Boston College, 2009. - 49 pages. [RKN: 71942]

This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocksremain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941-45 and 22 percent of late boomers born 1961-65would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to

14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly, to 19percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed theirstock market losses.http://crr.bc.edu/images/stories/wp 2009-30.pdf

AUSTRALIA

Quasi-markets and service delivery flexibility following a decade of employment assistance reform in Australia. Considine, Mark;Lewis, Jenny M; O'Sullivan, Siobhan [RKN: 45453]Shelved at: Per: JSP (Oxford)Journal of Social Policy(2011)40 (4) : 811-833.

Available via Athens: Cambridge JournalsIn 1998, we were witnessing major changes in frontline social service delivery across the OECD and this was theorised as theemergence of a post-Fordist welfare state. Changes in public management thinking, known as New Public Management (NPM),informed this shift, as did public choice theory. A 1998 study of Australia's then partially privatised employment assistance sectorprovided an ideal place to test the impact of such changes upon actual service delivery. The study concluded that frontline staff


10/39

3

behaviour did not meet all the expectations of a post-Fordist welfare state and NPM, although some signs of specialisation,flexibility and networking were certainly evident (Considine, 1999). Ten years on, in 2008, frontline staff working in Australia's nowfully privatised employment sector participated in a repeat study. These survey data showed convergent behaviour on the part ofthe different types of employment agencies and evidence that flexibility had decreased. In fact, in the ten years between the twostudies there was a marked increase in the level of routinisation and standardisation on the frontline. This suggests that the sectordid not achieve the enhanced levels of flexibility so often identified as a desirable outcome of reform. Rather, agencies adoptedmore conservative practices over time in response to more detailed external regulation and more exacting internal businessmethods.http://www.openathens.net/

AUTOMOBILE INDUSTRY

Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. Tennyson,Sharon [RKN: 39618]Shelved at: Per: Geneva (Oxf)Geneva Risk and Insurance Review(2010)35 (1) : 19-46.

Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-riskconsumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, andtests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. Theempirical analysis uses 19902003 rating cell-level data from the Massachusetts automobile insurance market, in whichregulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found tobe significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.

BENCHMARKING

Benchmarks as limits to arbitrage: understanding the low-volatility anomaly.Baker, Malcolm; Bradley, Brendan; Wurgler, Jeffrey[RKN: 45094]Shelved at: Per: FAJ (Oxf)Financial Analysts Journal(2011)67, 1 (Jan/Feb) : 40-54.

Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatilitystocks. This anomaly may be partly explained by the fact that the typical institutional investor's mandate to beat a fixed benchmarkdiscourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.

BOND PRICES

International financial transmission: emerging and mature markets. Felices, Guillermo; Grisse, Christian; Yang, Jing (2009). Bankof England, 2009. - 43 pages. [RKN: 69967]Shelved at: Online only Shelved at: Online only

1997 onwards available online. Download as PDF.With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affectfinancial markets worldwide. The aim of this paper is to quantify the co-movements between bond markets in the US and emergingmarket economies using daily data from prior to the East Asian crisis through to the early stages of the current global financialcrisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We findthat shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the shortrun (consistent with flight to quality' effects), while shocks that increase US interest rates raise EMBIG spreads over longerhorizons (consistent with financing cost' or search for yield' effects). We also find that shocks that increase EMBIG spreads tendto widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emergingmarket economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates canexplain around 60%-70% of the variation of EMBIG and US high-yield spreads.http://www.bankofengland.co.uk/publications/workingpapers/index.htm

BUSINESS CYCLES

Manias, panics and crashes : a history of financial crises. Kindleberger, Charles P; Aliber, Robert Z (2011). - 6th ed. - Basingstoke:Palgrave Macmillan, 2011. - viii, 356 p pages. [RKN: 45150]Shelved at: EB/JNH/6 (Lon)

This sixth edition has been revised and expanded to bring the history of financial crisis up to date, covering such topics asspeculative manias, the lender of last resort and the case of Lehman Brothers.


11/39

4

CAPITAL ASSET PRICING MODEL

Calibration of stock betas from skews of implied volatilities. Fouque, Jean-Pierre; Kollman, Eli [RKN: 45256]Applied Mathematical Finance(2011)18 (1-2) : 119-137.

Available via Athens: Taylor & Francis OnlineWe develop call option price approximations for both the market index and an individual asset using a singular perturbation of acontinuous-time capital asset pricing model in a stochastic volatility environment. These approximations show the role played bythe asset's beta parameter as a component of the parameters of the call option price of the asset. They also show how these

parameters, in combination with the parameters of the call option price for the market, can be used to extract the beta parameter.Finally, a calibration technique for the beta parameter is derived using the estimated option price parameters of both the asset andmarket index. The resulting estimator of the beta parameter is not only simple to implement but has the advantage of beingforward looking as it is calibrated from skews of implied volatilities.http://www.openathens.net

CAPITAL CHOICE

Raising capital in an insurance oligopoly market. Hardelin, Julien; Lemoyne de Forges, Sabine - 26 pages. [RKN: 74943]Shelved at: Per: Geneva (Oxf)Geneva Risk and Insurance Review(2012)37 (1) : 83-108.

We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty.Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage gamewhere firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgameperfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the modelwith regard to the insurance industry specificities and regulation.

CHANNELS OF DISTRIBUTION

Market design for the provision of social insurance: the case of disability and survivors insurance in Chile. Reyes, Gonzalo(2010). 2010. - 24 pages. [RKN: 72696]Shelved at: Per: J.PEF (Oxf) Shelved at: JOU/PENJournal of Pension Economics & Finance(2010)9 (3) : 421-444.

Available from Athens: Cambridge JournalsAs part of the pension reform recently approved in Chile, the government introduced a centralized auction mechanism to provide

the Disability and Survivors (D&S) Insurance that covers recent contributors among the more than eight million participants in themandatory private pension system. This paper is intended as a case study presenting the main distortions found in thedecentralized operation of the system that led to this reform and the challenges faced when designing a competitive auctionmechanism to be implemented jointly by the Pension Fund Managers (AFP). When each AFP independently hired this insurancewith an insurance company, the process was not competitive: colligated companies ended up providing the service and distortionsaffected competition in the market through incentives to cream-skim members, efforts to block disability claims, lack of pricetransparency, and the insurance contract acting as a barrier to entry. Cross-subsidies, inefficient risk pooling, and regulatoryarbitrage were also present. The Chilean experience is relevant since other privatized systems with decentralized provision of thisinsurance may show similar problems as they mature. A centralized auction mechanism solves these market failures, but alsogives raise to new challenges, such as how to design a competitive auction that attracts participation and deters collusion. Designfeatures that were incorporated into the regulation to tackle these issues are presented here.http://www.openathens.net

CHILE


Available from Athens: Cambridge JournalsAs part of the pension reform recently approved in Chile, the government introduced a centralized auction mechanism to providethe Disability and Survivors (D&S) Insurance that covers recent contributors among the more than eight million participants in themandatory private pension system. This paper is intended as a case study presenting the main distortions found in thedecentralized operation of the system that led to this reform and the challenges faced when designing a competitive auctionmechanism to be implemented jointly by the Pension Fund Managers (AFP). When each AFP independently hired this insurancewith an insurance company, the process was not competitive: colligated companies ended up providing the service and distortionsaffected competition in the market through incentives to cream-skim members, efforts to block disability claims, lack of pricetransparency, and the insurance contract acting as a barrier to entry. Cross-subsidies, inefficient risk pooling, and regulatoryarbitrage were also present. The Chilean experience is relevant since other privatized systems with decentralized provision of thisinsurance may show similar problems as they mature. A centralized auction mechanism solves these market failures, but alsogives raise to new challenges, such as how to design a competitive auction that attracts participation and deters collusion. Designfeatures that were incorporated into the regulation to tackle these issues are presented here.


12/39

5

http://www.openathens.net

A Summary and Update of Developing Annuities Markets : The Experience of Chile. Rocha, Roberto; Rudolph, Heinz P (2010).World Bank, 2010. - 45 pages. [RKN: 72637]

The rapid growth of the market for retirement products in Chile has its origins in the pension reform that was implemented in 1981.But the successful development of an active annuity market also reflects many other factors. This paper summarizes and updatesan earlier longer study on the development of the Chilean annuity market. The update focuses on the numerous changes thatwere introduced in 2008. The most striking aspect of the Chilean experience is the very high rate of annuitization. This has beenlinked to the restrictions that have been applied to lump-sum withdrawals, the offer of inflation-protected annuities, and the robust

prudential regulation of providers. But the level of annuitization has also been supported by the annuitization incentives providedto early retirees and the influence of brokers and sales agents. The recent regulatory changes have weakened the impact of thelast two factors, while strengthening the demand for annuities at normal retirement.http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2010/06/01/000158349 20100601090117/Rendered/PDF/WPS5325.pdf

CONTRIBUTION RATE

Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints.Maurer,Raimond; Mitchell, Olivia S; Rogalla, Ralph - 10 pages. [RKN: 72369]Shelved at: Per: IME (Oxf)Insurance: Mathematics & Economics(2009)45 (1) : 25-34.

Available from Athens: ScienceDirectUsing a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system toa funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process weintegrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension managers objective of controllingcontribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current andprospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatilitywhile restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assessthe chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded publicpension system can be beneficial for both civil servants and taxpayers.Keywords: Public pensions; Defined benefit; Funding; Investing; Contribution rate risk; Conditional Value at Riskhttp://www.openathens.net

DEFINED BENEFIT SCHEMES



DERIVATIVES

Corrections to the prices of derivatives due to market incompleteness. German, David [RKN: 45258]Applied Mathematical Finance(2011)18 (1-2) : 155-187.

Available via Athens: Taylor & Francis OnlineWe compute the first-order corrections to marginal utility-based prices with respect to a 'small' number of random endowments inthe framework of three incomplete financial models. They are a stochastic volatility model, a basis risk and market portfolio modeland a credit-risk model with jumps and stochastic recovery rate.http://www.openathens.net


13/39

6

DISABILITY INSURANCE


Available from Athens: Cambridge JournalsAs part of the pension reform recently approved in Chile, the government introduced a centralized auction mechanism to provide

the Disability and Survivors (D&S) Insurance that covers recent contributors among the more than eight million participants in themandatory private pension system. This paper is intended as a case study presenting the main distortions found in thedecentralized operation of the system that led to this reform and the challenges faced when designing a competitive auctionmechanism to be implemented jointly by the Pension Fund Managers (AFP). When each AFP independently hired this insurancewith an insurance company, the process was not competitive: colligated companies ended up providing the service and distortionsaffected competition in the market through incentives to cream-skim members, efforts to block disability claims, lack of pricetransparency, and the insurance contract acting as a barrier to entry. Cross-subsidies, inefficient risk pooling, and regulatoryarbitrage were also present. The Chilean experience is relevant since other privatized systems with decentralized provision of thisinsurance may show similar problems as they mature. A centralized auction mechanism solves these market failures, but alsogives raise to new challenges, such as how to design a competitive auction that attracts participation and deters collusion. Designfeatures that were incorporated into the regulation to tackle these issues are presented here.http://www.openathens.net

EMERGING MARKETS


During the global financial crisis of 2008, emerging markets declined almost to the same extent as developed markets, castingdoubts on their ability to provide diversification benefits. This article aims to assess the benefit of adding the volatility index, as anasset class, instead of emerging markets to the domestic portfolios of US and UK investors. The results show that for both US andUK investors, portfolios comprising volatility-based contracts outperform emerging markets portfolios on the basis of portfolioperformance metrics, such as the Sortino ratio, the Adjusted Sharpe ratio and the Stutzer index. The results imply that USinvestors seeking risk reduction have an alternative investment opportunity in volatility-based contracts rather than investing inemerging markets. Investing in emerging markets is fraught with political and exchange rate risks, whereas investing in the VIX isfree of these risks. Currently, there are no exchange-traded products on the FTSE 100 VIX. This study makes a case forintroducing them.

EMPLOYMENT

Quasi-markets and service delivery flexibility following a decade of employment assistance reform in Australia. Considine, Mark;Lewis, Jenny M; O'Sullivan, Siobhan [RKN: 45453]Shelved at: Per: JSP (Oxford)Journal of Social Policy(2011)40 (4) : 811-833.

Available via Athens: Cambridge JournalsIn 1998, we were witnessing major changes in frontline social service delivery across the OECD and this was theorised as theemergence of a post-Fordist welfare state. Changes in public management thinking, known as New Public Management (NPM),informed this shift, as did public choice theory. A 1998 study of Australia's then partially privatised employment assistance sectorprovided an ideal place to test the impact of such changes upon actual service delivery. The study concluded that frontline staffbehaviour did not meet all the expectations of a post-Fordist welfare state and NPM, although some signs of specialisation,

flexibility and networking were certainly evident (Considine, 1999). Ten years on, in 2008, frontline staff working in Australia's nowfully privatised employment sector participated in a repeat study. These survey data showed convergent behaviour on the part ofthe different types of employment agencies and evidence that flexibility had decreased. In fact, in the ten years between the twostudies there was a marked increase in the level of routinisation and standardisation on the frontline. This suggests that the sectordid not achieve the enhanced levels of flexibility so often identified as a desirable outcome of reform. Rather, agencies adoptedmore conservative practices over time in response to more detailed external regulation and more exacting internal businessmethods.http://www.openathens.net/


14/39

7

EQUITIES

Do implied volatilities predict stock returns?.Ammann, Manuel; Verhofen, Michael; Suss, Stephan (2009). 2009. - 13 pages. [RKN:71585]Shelved at: Per: J.Asset Man (Oxf)Journal of Asset Management(2009)10 (4) : 222-234.

Using a complete sample of US equity options, we find a positive, highly significant relationship between stock returns and laggedimplied volatilities. The results are robust after controlling for a number of factors such as firm size, market valuation, analyst

recommendations and different levels of implied volatility. Lagged historical volatility isin contrast to the corresponding impliedvolatilitynot relevant for stock returns. We find considerable time variation in the relationship between lagged implied volatilityand stock returns.Keywords: implied volatility, expected returns, market efficiency

Exchange-traded funds, market structure, and the flash crash. Madhavan, Ananth [RKN: 45820]Shelved at: Per: FAJFinancial Analysts Journal(2012)68(4) : 20-35.

The author analyzes the relationship between market structure and the flash crash. The proliferation of trading venues hasresulted in a market that is more fragmented than ever. The author constructs measures to capture fragmentation and shows thatthey are important in explaining extreme price movements. New market structure reforms should help mitigate such marketdisruptions in the future but have not eliminated the possibility of another flash crash, albeit with a different catalyst.

EVALUATION

Evaluation of the Basel VaR-based market risk charge and proposals for a needed adjustment.Fricke, Jens; Pauly, Ralf [RKN:45848]Shelved at: Per (Oxf)Journal of Risk Management in Financial Institutions(2012)5(4) : 398-420.

Available via Athens: MetaPressThis analysis shows that in high risk situations the Basel II guidelines fail in the attempt to cushion against large losses by highercapital requirements. One of the factors causing this problem is that the built-in positive incentive of the penalty factor resultingfrom the Basel backtesting is set too weak. Therefore, this paper proposes a new procedure for market risk regulation and itdemonstrates how this works with real time series. A comparison study shows that contrary to the existing Basel regulation theproposition presented here has the intended quality as a built-in incentive for choosing a reliable forecasting model. By includingthe expected shortfall as a further measure of risk this paper's concept yields a steeper increase of the penalty factor and as aconsequence a stronger effect of risk underestimation on the capital requirement. The recent proposal of the Basel Committee on

Banking Supervision may have the same weakness as the Basel II regulation because it is constructed in an analogous manner.http://www.openathens.net

EXCHANGE TRADED FUNDS (EFTS)

Exchange-traded funds, market structure, and the flash crash. Madhavan, Ananth [RKN: 45820]Shelved at: Per: FAJFinancial Analysts Journal(2012)68(4) : 20-35.

The author analyzes the relationship between market structure and the flash crash. The proliferation of trading venues hasresulted in a market that is more fragmented than ever. The author constructs measures to capture fragmentation and shows thatthey are important in explaining extreme price movements. New market structure reforms should help mitigate such marketdisruptions in the future but have not eliminated the possibility of another flash crash, albeit with a different catalyst.

FINANCIAL CRISES

Legal and regulatory update : Global identification standards for counterparties and other financial market participants. Grody,Allan D; Hughes, Peter J; Reininger, Daniel [RKN: 45711]Shelved at: Per (Oxf)Journal of Risk Management in Financial Institutions(2012)5(3) : 288-304.

Available via Athens: MetaPressFinancial regulators are focused on observing systemic risk across enormously complex interconnected global financialinstitutions. It is understood that without an ability to view the underlying positions and cash flows, valued in standard ways andaggregated by counterparty through common identifiers, neither risk triggers nor risk exposures can be observed nor can systemicthreats be detected. It has been accepted by regulators that the very first pillar of global financial reform is a standard for

identifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique andstandardised legal entity identifier (the LEI) is the first step. This paper reports on past and current efforts to develop a globalidentification system for such a purpose. The authors argue for a government/industry partnership in which governance is sharedand operating elements of the global identification system are compartmentalised for control, security and confidentiality


15/39

8

purposes. The paper demonstrates a proposed global identification system that satisfies all known elements of regulators'requirements for the LEI and also lays the foundation for accommodating other attributes, such as business ownershiphierarchical structures and contract and instrument identification.http://www.openathens.net

Lessons from the financial crisis: insights from the defining economic event of our lifetime.Berd, Arthur M (ed.) (2010). -London: Incisive Financial Publishing Ltd; Risk Books, 2010. - xlv, 605 pages. [RKN: 43535]Shelved at: JNH/EB/313 (Lon)



Regulating financial markets : Protecting us from ourselves and others.Statman, Meir [RKN: 39212]Shelved at: Per: FAJ (Oxf)Financial Analysts Journal(2009)65, 3 (May/June) : 22-31.

The current global financial and economic crisis highlights the ongoing tug-of-war between those who pull toward free markets andthose who pull toward strict regulation of marketsbetween those who pull toward libertarianism and those who pull towardpaternalism. Rising stock markets and economic prosperity empower those who favor free markets and libertarianism; stockmarket crashes and economic recessions empower those who favor strict regulation and paternalism. This article discusses thecurrent crisis against the backdrop of earlier crises and focuses on margin regulations, which limit leverage; suitability regulations,which require providers of financial products to act in the interests of their clients; blue-sky laws, which prohibit securities deemedunfair or unduly risky; and mandatory-disclosure regulations, which require providers of financial products to disclose pertinent

information even if potential buyers do not ask for it.


During the global financial crisis of 2008, emerging markets declined almost to the same extent as developed markets, castingdoubts on their ability to provide diversification benefits. This article aims to assess the benefit of adding the volatility index, as anasset class, instead of emerging markets to the domestic portfolios of US and UK investors. The results show that for both US andUK investors, portfolios comprising volatility-based contracts outperform emerging markets portfolios on the basis of portfolioperformance metrics, such as the Sortino ratio, the Adjusted Sharpe ratio and the Stutzer index. The results imply that USinvestors seeking risk reduction have an alternative investment opportunity in volatility-based contracts rather than investing inemerging markets. Investing in emerging markets is fraught with political and exchange rate risks, whereas investing in the VIX isfree of these risks. Currently, there are no exchange-traded products on the FTSE 100 VIX. This study makes a case forintroducing them.

Retirement Security and the Stock Market Crash: What Are the Possible Outcomes?.Butrica, Barbara A.; Smith, Karen E; Toder,Eric J (2009). - Chestnut Hill: Center for Retirement Research at Boston College, 2009. - 49 pages. [RKN: 71942]

This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocksremain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941-45 and 22 percent of late boomers born 1961-65would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly, to 19percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed theirstock market losses.http://crr.bc.edu/images/stories/wp 2009-30.pdf

Verdict on the crash : Causes and policy implications.Booth, Philip; Alexander, James; Beenstock, Michael; Butler, Eamonn;Congdon, Tim; Copeland, Laurence; Dowd, Kevin; Grenwood, John; Gregg, Samuel; Kay, John; Llewellyn, David T; Morrison, Alan D;Myddelton, D R; Schwartz, Anna J; Wood, Geoffrey (2009). - London: Institute of Economic Affairs, 2009. - 199 pages. [RKN: 39340]Shelved at: JNH/313 (Lon)

This book challenges the myth that the recent banking crisis was caused by insufficient statutory regulation of financial markets.

Though it finds that statutory regulation failed, and that market participants took more risks than they should have done, it appearsthat statutory regulation made matters worse rather than better. Furthermore the fifteen experts who have contributed to this studyfind that government policy failed in other respects too. As with the boom and bust that led to the Great Depression, loosemonetary policy on both sides of the Atlantic helped to promote an asset price bubble and credit boom which, at some stage, wasbound to have serious consequences. Rejecting the failed approach of discretionary detailed regulation of the financial system,the authors instead propose specific and incisive regulatory tools that are designed to target, in a non-intrusive way, particularweaknesses in a banking system that is backed by deposit insurance. This study, by some of the most eminent authors in the field,is essential reading for all those who are interested in the policy implications of recent events in financial markets.


16/39

9

FINANCIAL MARKETS

Legal and regulatory update : Global identification standards for counterparties and other financial market participants. Grody,Allan D; Hughes, Peter J; Reininger, Daniel [RKN: 45711]Shelved at: Per (Oxf)Journal of Risk Management in Financial Institutions(2012)5(3) : 288-304.

Available via Athens: MetaPressFinancial regulators are focused on observing systemic risk across enormously complex interconnected global financial

institutions. It is understood that without an ability to view the underlying positions and cash flows, valued in standard ways andaggregated by counterparty through common identifiers, neither risk triggers nor risk exposures can be observed nor can systemicthreats be detected. It has been accepted by regulators that the very first pillar of global financial reform is a standard foridentifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique andstandardised legal entity identifier (the LEI) is the first step. This paper reports on past and current efforts to develop a globalidentification system for such a purpose. The authors argue for a government/industry partnership in which governance is sharedand operating elements of the global identification system are compartmentalised for control, security and confidentialitypurposes. The paper demonstrates a proposed global identification system that satisfies all known elements of regulators'requirements for the LEI and also lays the foundation for accommodating other attributes, such as business ownershiphierarchical structures and contract and instrument identification.http://www.openathens.net




Panic: the story of modern financial insanity.Lewis, Michael (2009). - New York: W. W. Norton & Company, 2009. - 391 pages.[RKN: 38665]Shelved at: EA (Lon)

Review: RKN 39106The author has chosen more than f ifty pieces of brilliant journalism to illuminate the most violent and costly upheavals in recentfinancial history to be included in this book. Some paint the mood and market factors leading up to the particular crash, or showwhat people thought was happening at the time. Others analyze what actually happened.

Regulating financial markets : Protecting us from ourselves and others.Statman, Meir [RKN: 39212]

Shelved at: Per: FAJ (Oxf)Financial Analysts Journal(2009)65, 3 (May/June) : 22-31.The current global financial and economic crisis highlights the ongoing tug-of-war between those who pull toward free markets andthose who pull toward strict regulation of marketsbetween those who pull toward libertarianism and those who pull towardpaternalism. Rising stock markets and economic prosperity empower those who favor free markets and libertarianism; stockmarket crashes and economic recessions empower those who favor strict regulation and paternalism. This article discusses thecurrent crisis against the backdrop of earlier crises and focuses on margin regulations, which limit leverage; suitability regulations,which require providers of financial products to act in the interests of their clients; blue-sky laws, which prohibit securities deemedunfair or unduly risky; and mandatory-disclosure regulations, which require providers of financial products to disclose pertinentinformation even if potential buyers do not ask for it.

Systemic risk, multiple equilibriums, and market dynamics: What you need to know and why. El-Erian, Mohamed A; Spence,Michael (2012). 2012. [RKN: 45857]Shelved at: Per: FAJFinancial Analysts Journal(2012)68(5) : 18-24.

Using an array of real-life examplesincluding the current sovereign debt crisis in the eurozonethe authors analyze the

underlying dynamics of the periodic bouts of systemic path dependence that affect not only financial markets (their functioning andstability, investment returns, and volatility) but also investment strategy itself. Their analysis explains how sudden shifts inexpectations can morph into particularly disruptive multiple-equilibrium dynamics and points to possible implications for marketoutcomes, market equilibriums, and policy responses.


This book challenges the myth that the recent banking crisis was caused by insufficient statutory regulation of financial markets.Though it finds that statutory regulation failed, and that market participants took more risks than they should have done, it appearsthat statutory regulation made matters worse rather than better. Furthermore the fifteen experts who have contributed to this studyfind that government policy failed in other respects too. As with the boom and bust that led to the Great Depression, loosemonetary policy on both sides of the Atlantic helped to promote an asset price bubble and credit boom which, at some stage, wasbound to have serious consequences. Rejecting the failed approach of discretionary detailed regulation of the financial system,the authors instead propose specific and incisive regulatory tools that are designed to target, in a non-intrusive way, particular

weaknesses in a banking system that is backed by deposit insurance. This study, by some of the most eminent authors in the field,is essential reading for all those who are interested in the policy implications of recent events in financial markets.


17/39

10

FINLAND

Enhancement of value portfolio performance using momentum and the long-short strategy: the Finnish evidence. Leivo, Timo H;Patari, Eero J Palgrave Macmillan, [RKN: 45100]Shelved at: Per: J.Asset Man (Oxf)Journal of Asset Management(2011)11 (6) : 401-416.

This article examines the added value of combining price momentum with various value strategies in the Finnish stock marketduring the period 1993-2008. The results show that taking into account the price momentum of value stocks enhances portfolio

performance. Among the best-performing portfolios, the performance improvement resulting from the inclusion of a momentumindicator is the greatest for value portfolios that are formed on the basis of three-composite value measures. The risk-adjustedperformance of the best value winner portfolios can be enhanced further by following the 130/30 long-short strategy. The bestlong-short portfolios significantly outperform the corresponding long-only value winner portfolios and more than double theaverage return of the stock market coupled with the volatility decrease.

GERMANY



GOVERNMENT



This book challenges the myth that the recent banking crisis was caused by insufficient statutory regulation of financial markets.Though it finds that statutory regulation failed, and that market participants took more risks than they should have done, it appearsthat statutory regulation made matters worse rather than better. Furthermore the fifteen experts who have contributed to this studyfind that government policy failed in other respects too. As with the boom and bust that led to the Great Depression, loosemonetary policy on both sides of the Atlantic helped to promote an asset price bubble and credit boom which, at some stage, wasbound to have serious consequences. Rejecting the failed approach of discretionary detailed regulation of the financial system,the authors instead propose specific and incisive regulatory tools that are designed to target, in a non-intrusive way, particular

weaknesses in a banking system that is backed by deposit insurance. This study, by some of the most eminent authors in the field,is essential reading for all those who are interested in the policy implications of recent events in financial markets.

GUARANTEES

Pension plan solvency and extreme market movements: a regime switching approach : A background paper for discussion.Freeman, Mark; Clacher, Iain; Hillier, David; Kemp, Malcolm H D; Abourashschi, Niloufar; Zhang, Qi (2012). - London: Institute andFaculty of Actuaries, 2012. - 17 pages. [RKN: 43517]Shelved at: ifp 06/12

The global credit crunch has forcefully highlighted the impact of extreme market events on both the asset and liability side of apension plan's balance sheet. Over the course of 2008 there were severe falls in global stock markets because of the financialcrisis and, in particular, the failure of Lehman Brothers. However, the dramatic collapse in pension plan solvency that was

observed in early 2009 was not caused solely by the signicant falls in the value of pension plan assets that had occurred. In March2009 quantitative easing pushed bond yields signicantly lower, thereby increasing the present value of defined benefit pensionliabilities. As a consequence, the net funding position of defined benefit pension plans in the UK swung dramatically from a surplusof 149.2bn in June 2007 to a deficit of 208.6bn in March 2009, back to a surplus of 35.5bn in February 2011 and then back to a


18/39

11

deficit again of 206.2bn in March 2012. These turbulent conditions highlighted the need to capture extreme market movements inthe modelling of future pension fund solvency risk. Traditional models of asset returns assume that the statistical parameters thatdrive asset returns and interest rate changes remain constant over time. In these `one state' models, stock markets might produceaverage returns of approximately 10% a year every year. It has recently been recognized that average returns, the variance ofreturns and the covariances between returns to different asset classes can be more accurately modelled using parameters thatswitch between more than one set of values. As a result, these multi-state' models are gaining in popularity as the benefits ofapplying such models to practical problems, such as asset allocation decisions, are becoming increasingly recognized in anumber of fields. In particular, these models can capture rare, but extreme, market events, the time-variation in asset returnvolatility and the "fat-tailed" nature of stock returns. We therefore model the future solvency of defined-benefit pension plans using

regime switching models and compare the outcomes with those of traditional one-state models. Our results show that futureprojections of pension plan solvency are highly model-dependent. In particular, if discount rates are assumed to remain constant,then regardless of the choice of model (one-state or multi-state) the probability of future deficits is dramatically under-statedcompared to forecasts where a stochastic discount rate process is used. Moreover, our results suggest that by allowing forleptokurtosis in asset returns the probability of a future deficit is much greater. However, it is also important to note that allowing forcorrelations between asset returns and the discount rate signifi_cantly reduces the assessed probability of underfunding in thefuture.http://www.actuaries.org.uk/sites/all/files/Print%20version%20Freeman%20et%20al%20080512vps.pdf

HEDGE FUNDS

Indian stock market volatility in recent years : Transmission from global market, regional market and traditional domesticsectors.Sarkar, Amitava; Chakrabarti, Gagari; Sen, Chitrakalpa [RKN: 39145]

Shelved at: Per: J.Asset Man (Oxf)Journal of Asset Management(2009)10 (1) : 63-71.

Estimation of financial models of hedge fund returns often gives rise to abnormally high alphas. This phenomenon may be due tomis-specified models, but recently the introduction of volatility factors in hedge fund returns models (Kuenzi and Xu, 2007) hasbeen viewed as a solution to solve the alpha puzzle. This paper shows that modelling the volatility of the innovation term of hedgefund return models might be another way to explain the alpha puzzle. The model proposed in this paper is a factor model thatincorporates an 'alternative' factor, which is the return of a short put on the Standard & Poor's 500 whose volatility is the VIX. Thispaper takes an overall view to analyse the problem of specification errors in financial models. To account for specification errors,it proposes a new estimator based on the generalised method of moments (GMM) whose instruments are the higher moments ofreturns, the GMM-hm. Some transformations of the basic factor model, which are recommended in the financial literature toimprove the estimation of the alpha, are considered the n-CAPM and the conditional model. Some GARCH and EGARCHspecifications of our basic model of returns are also estimated. Our results show that modelling the volatility of the innovation is thebest way to lower the alpha. The n-CAPM has also had some success in reducing the alpha. The alpha is not the only garbage bagof a returns model (Jaeger and Wagner, 2005), but the alpha and the innovation both constitute the garbage bag.

HOUSING MARKET

Estimation of housing price jump risks and their impact on the valuation of mortgage insurance contracts.Chen, Ming-Chi;Chang, Chia-Chien; Lin, Shih-Kuei; Shyu, So-De [RKN: 39628]Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOUJournal of Risk and Insurance(2010)77 (2) : 399-422.

Available from Athens: Wiley Online LibraryHousing price jump risk and the subprime crisis have drawn more attention to the precise estimation of mortgage insurancepremiums. This study derives the pricing formula for mortgage insurance premiums by assuming that the housing price processfollows the jump diffusion process, capturing important characteristics of abnormal shock events. This assumption is consistentwith the empirical observation of the U.S. monthly national average new home returns from 1986 to 2008. Furthermore, weinvestigate the impact of price jump risk on mortgage insurance premiums from shock frequency of the abnormal events,abnormal mean and volatility of jump size, and normal volatility. Empirical results indicate that the abnormal volatility of jump size

has the most significant impact on mortgage insurance premiums.http://www.openathens.net

Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation.S, Filipa; Towbin,Pascal; Wieladek, Tomasz (2011). - London: Bank of England, 2011. - 42 pages. [RKN: 73716]

1997 onwards available online. Download as PDF.A number of OECD countries experienced an environment of low interest rates and a rapid increase inhousing market activity during the last decade. Previous work suggests three potential explanations forthese events: expansionary monetary policy, capital inflows due to a global savings glut and excessivefinancial innovation combined with inappropriately lax financial regulation. In this study we examinethe effects of these three factors on the housing market. We estimate a panel VAR for a sample ofOECD countries and identify monetary policy and capital inflows shocks using sign restrictions.To explore how these effects change with the structure of the mortgage market and the degree ofsecuritisation, we augment the VAR to let the coefficients vary with mortgage market characteristics.Our results suggest that both types of shocks have a significant and positive effect on real house prices,real credit to the private sector and real residential investment. The responses of housing variables to

both types of shocks are stronger in countries with more developed mortgage markets, roughly doublingthe responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation isparticularly strong for capital inflows shocks, increasing the response of real house prices, residentialinvestment and real credit by a factor of two, three and five, respectively.


19/39

12

http://www.bankofengland.co.uk/publications/workingpapers/

INDEXES

Short positions, rally fears and option markets.Eberlein, Ernst; Madan, Dilip B [RKN: 39519]Applied Mathematical Finance(2010)17 (1-2) : 83-98.

Available from Athens: Taylor and FrancisIndex option pricing on world market indices are investigated using Levy processes with no positive jumps. Economically this ismotivated by the possible absence of longer horizon short positions while mathematically we are able to evaluate for suchprocesses the probability of a rally before a crash. Three models are used to effectively calibrate index options at annual maturity,and it is observed that positive jumps may be needed for FTSE, N225 and HSI. Rally before a crash probabilities are shown tohave fallen by 10 points after July 2007. Typical implied volatility curves for such models are also described and illustrated. Theyhave smirks and never smile.http://www.openathens.net

INDIA

Do macro-economic variables explain stock-market returns? : Evidence using a semi-parametric approach.Mishra, Sagarika;

Singh, Harminder Palgrave Macmillan, [RKN: 45675]Shelved at: Per: J.Asset Man (Oxf)Journal of Asset Management(2012)13 (2) : 115-127.

In this article we test whether the stock market in India is driven by macro-economic fundamentals. We use a non-parametricapproach to determine whether any variables are nonlinearly related with stock returns and the variability of stock returns by takingmonthly observations from 1998 to 2008. We consider exchange rate, interest rate, industrial production, inflation and foreigninstitutional investments as macro-economic factors. Further, we employ a semi-parametric approach to see whether any of themacro-variables have a significant nonlinear impact on the stock return and on the variability of stock return. Our results suggestthat of the Ordinary Least Square and semi-parametric approaches, the semi-parametric approach better explains the stockreturns and volatility.

INSURANCE

Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. Tennyson,Sharon [RKN: 39618]Shelved at: Per: Geneva (Oxf)Geneva Risk and Insurance Review(2010)35 (1) : 19-46.

Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-riskconsumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, andtests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. Theempirical analysis uses 19902003 rating cell-level data from the Massachusetts automobile insurance market, in whichregulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found tobe significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.

State involvement in insurance markets.Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 32pages. [RKN: 74774]Shelved at: JOUSigma(2011)3

More and more governments are leveraging private insurance skills and the growing capacity of the sector to cover catastrophelosses as well as a wide range of other risks, Swiss Re reveals in its latest sigma research publication. The Japanese earthquaketragedy earlier this year caused more than USD 200 billion in total property losses, but only USD 30 billion was covered by privateinsurance. In contrast, private insurers will pay about USD 9 billion of the USD 12 billion in total property losses from the recentChristchurch, New Zealand earthquake.http://www.swissre.com


20/39

13

INSURANCE BROKING

Market reaction to regulatory action in the insurance industry : The case of contingent commission.Cheng, Jiang; Elyasiani,Elyas; Lin, Tzu-Ting [RKN: 39626]Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOUJournal of Risk and Insurance(2010)77 (2) : 347-368.

Available from Athens: Wiley Online LibraryWe examine the market's reaction to New York Attorney General Eliot Spitzer's civil suit against mega-broker Marsh for bid rigging

and inappropriate use of contingent commissions within a generalized autoregressive conditionally heteroskedastic (GARCH)framework. Effects on the stock returns of insurance brokers and insurers are tested. The findings are: (1) GARCH effects aresignificant in modeling broker/insurer returns; (2) the suit generated negative effects on the brokerage industry and individualbrokers, suggesting that contagion dominates competitive effects; (3) spillover effects from the brokerage sector to insurancebusiness are significant and mostly negative, demonstrating industry integration; and (4) information-based contagion issupported, as opposed to the pure-panic contagion.http://www.openathens.net

INVESTMENT

Retirement savings guidelines for residents of emerging market countries.Meng, Channarith; Pfau, Wade Donald - 10 pages.[RKN: 74905]Shelved at: JOUPensions: An International Journal(2011)16 (4) : 256-265.

Available online via Athens: Palgrave

Most literature about retirement planning treats the working (accumulation) and retirement (decumulation) phases separately. Thetraditional approach decides on a safe withdrawal rate, uses it to derive a wealth accumulation target and then calculates thesavings rate required to achieve this wealth target. Because low sustainable withdrawal rates tend to occur after bull markets,such a formulation will push individuals toward unnecessarily high savings rates to attain their desired retirement spending goals,reducing their feasible lifestyle before retirement. By jointly considering both phases of retirement planning, this study providessavings rate guidelines for individuals in 25 emerging market countries. The savings rates calculated here are those that providean adequate success rate in financing desired retirement expenditures using bootstrapped Monte Carlo simulations. For manyemerging market countries, these savings rates will be high, given the high volatility of returns for savings instruments and theinflationary environment. Starting to save early and using a relatively low stock allocation, a finding that contrasts with studiesabout the United States, provide the lowest necessary savings rate for a given probability of success.http://www.openathens.net

When is stock picking likely to be successful? : Evidence from Mutual Funds.Duan, Ying; Hu, Gang; McLean, R David [RKN:39004]Shelved at: Per: FAJ (Oxf)Financial Analysts Journal(2009)65, 2 (March/April) : 55-66.

Consistent with a costly arbitrage equilibrium in which arbitrage costs insulate mispricing, this study finds that mutual fundmanagers have stock-picking ability for stocks with high idiosyncratic volatility but not for stocks with low idiosyncratic volatility.These findings suggest that fund managers and other investors may want to pay special attention to high-idiosyncratic-volatilitystocks because they provide fertile ground for stock picking. The study also finds that the stock-picking ability of the averagemutual fund manager declined after the extreme growth in the number of both mutual funds and hedge funds in the late 1990s.

INVESTMENT ATTITUDES

What is the impact of stock market contagion on an investors portfolio choice?.Branger, Nicole; Kraft, Holger; Meinerding,

Christoph - 19 pages. [RKN: 72377]Shelved at: Per: IME (Oxf)Insurance: Mathematics & Economics(2009)45 (1) : 94-112.

Available from Athens: ScienceDirectStocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk ofcrashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on theportfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantlyadjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span betweenjumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoringcontagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utilitylosses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not t radederivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors security demands, since itreduces their ability to diversify their portfolios.Keywords: Asset allocation; Jumps; Contagion; Model riskhttp://www.openathens.net


21/39

14

LABOUR MARKET

Labour market institutions and unemployment volatility: evidence from OECD countries.Faccini, Renato; Bondibene, ChiaraRosazza (2012). - London: Bank of England, 2012. - 45 pages. [RKN: 70093]

1997 onwards available online. Download as PDF.Using publicly available data for a group of 20 OECD countries, we find that the cyclical volatility of the unemployment rate exhibitssubstantial cross-country and time variation. We then investigate empirically whether labour market institutions can account forthis observed heterogeneity and find that the impact of various institutions on cyclical unemplo

stockmarket volatility

Documents