Covariance of discounted compound renewal sums with a stochastic interest rate

Formulas have been obtained for the moments of the discounted aggregate claims process, for a constant instantaneous interest rate, and for a claims number process that is an ordinary or a delayed renewal process. In this paper, we present explicit formulas on the first two moments and the joint moment of this risk process, for a non-trivial extension to a stochastic instantaneous interest rate. Examples are given for Erlang claims number processes, and for the Ho–Lee–Merton and the Vasicek interest rate models.     

Minimizing the Risk of a Financial Product Using a Put Option

In this article, we elaborate a method for determining the optimal strike price for a put option, used to hedge a position in a financial product such as a basket of shares and a bond. This strike price is optimal in the sense that it minimizes, for a given budget, a class of risk measures satisfying certain properties. Formulas are derived for one single underlying as well as for a weighted sum of underlyings. For the latter we will consider two cases depending on the dependence structure of the components in this weighted sum. Applications and numerical results are presented.     

Academic Dishonesty: An Exploratory Study Examining Whether Insurance Students Are Different From Other College Students

This exploratory study compares academic dishonesty scores for insurance students in one insurance program to those for other college students using survey data from business and nonbusiness students at two universities. Academic dishonesty was measured using a modified version of a scale developed by McCabe and Trevino , with a higher score indicating greater academic dishonesty. The average score on total academic dishonesty was significantly higher for insurance students than for other business students and lower, but not significantly so, than the scores for nonbusiness students. Regression analysis indicates that a significant predictor of academic dishonesty for both insurance students and other business students is the perceived relevance of the work to the student's major coursework. There were some differences, however, in the other significant predictors for insurance students versus other business students. Specifically, year in school was significant only for insurance majors, while membership in a Greek social organization and a belief that there was a low risk of getting caught were significant only for other business majors. Furthermore, the significant predictors of academic dishonesty were different for insurance students and nonbusiness students. Overall, the results indicate that insurance students are more likely to engage in academically dishonest behavior than other business students, and the motivation for academic dishonesty differs for insurance students and other students (both nonbusiness and other business). This suggests a need for insurance educators to address academic dishonesty using an approach that is somewhat different than that used for other students.     

Entry into Banking Markets and the Early-Mover Advantage

Using a sample for 1972–2002 with over 10,000 bank entries into local markets, we find a market share advantage for early entrants. In particular, the earlier a bank enters, the larger is its market share relative to other banks, controlling for firm, market, and time effects, with a market share advantage for early movers between 1 and 15 percentage points, depending on the order of entry. The strongest early-mover advantage is for banks that were in our sample in 1972 and survive into the 1990s. Moreover, early entrants appear to have such hold in the market by strategically investing in larger branch networks. Even controlling for the potential survivorship bias, we find that a bank's share decreases by 0.1 percentage points for a change in its order of entry from n th to ( n + 1)th. High growth markets show a smaller difference between late and early movers, consistent with a larger fraction of consumers yet to be locked in with a bank in these markets.     

Pricing Foreign Exchange Options Under Intervention by Absorption Modeling

We consider option pricing for a foreign exchange (FX) rate where interventions by an authority may take place when the rate approaches to a certain level at the down side. We formulate the forward FX model by a diffusion process which is stopped by a hitting time of an absorption boundary. Moreover, for a deterministic volatility case with a moving absorption whose level is described by an ordinary differential equation, we obtain closed-form formulas for prices of a European put option and a digital option, and Greeks of the put option. Furthermore, we show an extension of the pricing formula to the case where the intervention level is unknown. In numerical examples, we show option prices for different strikes for the absorption model and the extended model. We compare the model prices with the market prices for EURCHF options traded before January 2015 with the absorption model, and also show experiments of the extended model as an application to the pricing under uncertain views on the intervention.     

Eine goldene Regel für die Modellierung von Daten zur Erstellung von Data-Mining-Klassifikationsmodellen unter besonderer Berücksichtigung von Problemstellungen in der Versicherungswirtschaft

A golden rule for data modelling for data mining classification models with special considerations of problems in insurances. To create classification models to avoid contract cancellations and for cross selling purposes to be used in marketing and sales of insurance companies the necessary data modelling will be discussed. Starting from a binary classification variable — cancelled contracts and active contracts, customers of a branch and non-customers of a branch — we in particular focus on the importance of historical data: To be able to detect decision patterns for cancellations respectively for new contracts in the data with the help of data mining tools, it is necessary for such contracts respectively customers not to use actual data, but data as they were at the time of decision. This obvious, but rarely used principle, is presented in detail as a golden rule for correct data modelling in such situations. As a case study a project and results for nine branches in each case of the Gothaer Versicherungen is presented.     

Is There a January Effect in Corporate Bond and Paper Returns?

This paper examines the question of seasonality in corporate bond and commercial paper returns by testing specifically for a January effect. Complete data covering a 131-year period for both series, as well as term premiums, are analyzed using a procedure that provides consistent estimates of the variance-covariance matrix. The results suggest that a January effect does exist for both assets for the entire period; however, closer examination reveals a strong January effect for the pre-1915 period but a dampening thereafter. We conclude that precise results depend primarily upon the time period chosen and the debt instrument examined. Tests involving the inflation rate strengthen the case for a January seasonal.     

The Tone from Above: The Effect of Communicating a Supportive Regulatory Strategy on Reporting Quality

In collaboration with the Authority for the Financial Markets in the Netherlands, we manipulate the content of official letters that instruct financial intermediaries to submit a mandatory self‐assessment. As part of the Registered Report Process, we submitted our hypotheses, experimental procedure, and planned statistical analyses before data collection. We predicted that a request indicating a supportive regulatory attitude has a positive effect on reporting quality on average. We also predicted this effect to be stronger for small firms and for firms with a long‐term orientation, and to become negative for firms with a short‐term orientation. Planned analyses show that a supportive letter reduced reporting quality unless firms had a long‐term orientation, supporting the moderating influence of time horizon, but providing no support for the expected average effect or for moderation by firm size.     

The effectiveness of the auditor's going-concern evaluation as an external governance mechanism: Evidence from loan defaults

When there is significant doubt about a firm's ability to continue as a going concern, professional standards require independent auditors to disclose the uncertainty in their report. This study assesses the influence of the independent auditor's going-concern evaluation by examining default following the release of the auditor's report. We use a proprietary sample maintained by the Portuguese Central Bank on 12,199 audit reports relating to approximately 2000 firms that are liable by law to have their accounts audited on an annual basis. Empirical estimation of a logit model controlling for accounting cash- flow-related and nonaccounting variables shows that the likelihood of default for firms that received going concern opinion is 2.792 times that of firms that received a clean opinion. Likelihood ratio tests for omitted variable also confirm the incremental predictive ability of going-concern opinion over and above accounting and nonaccounting variables for the estimation and hold-out samples. In the nondefaulting group, the average default rate is 6.05%, in the defaulting group it is 17.78%. The default rate for firms in the nondefaulting group that received a going-concern opinion is 9.92% and for firms that received a clean opinion it is 5.96%. In the defaulting group, the rate for firms that received a going-concern opinion is 35.49% and for firms that received a clean opinion it is 16.96%. Checks for robustness across different asset classes, age, industries, and regions indicate that firms that receive a going-concern opinion on average default more than those that receive a clean opinion.     

Assessment for congenital long QT syndrome

A 29-year-old male presented for an evaluation of his risk for having congenital long QT syndrome. Despite being asymptomatic and having a normal QTc interval on the resting ECG, a suggestive family history was an indication for a thorough cardiac evaluation. A geneticist reviewed this workup and recommended against genetic testing. While up to 10% of affected carriers of a congenital long QT syndrome gene mutation can be asymptomatic with a normal QTc, consideration of all of the clinical factors allowed for further risk stratification. The evaluation of an ECG for the long QT syndrome includes calculating a corrected QT interval for the heart rate and assessing the T-waves for morphology associated with this syndrome.     

'Nonprofits' need surplus too

By definition profit refers to the difference between revenue and expenses. In for-profit organizations profit or surplus gives a return to the owners of the company and serves as a source of financing for capital acquisitions and working capital. Nonprofit organizations, which are not allowed a surplus, don't suffer on the first count because they have no owners. But they do suffer on the second count because, if expected to grow, they need to finance asset replacement and growth. In these days when funds for long-term debt are becoming scarcer, this author asserts, the need for regulators to allow 'nonprofits' to keep a surplus is increasing. In this article, he argues for a surplus and then discusses how managers and regulators can determine how much a nonprofit organization should be allowed. He presents a combination of a modified version of the return-on-asset pricing model used in for-profit organizations and a model for assessing working capital needs associated with growth.     

Towards a fair degrowth-society: Justice and the right to a ‘good life’ beyond growth

A critical scrutiny is presented of the ethical assumptions of growth and degrowth theories with respect to distributive justice and the normative conditions for a ‘good human life’. An argument is made in favor of Sen's and Nussbaum's ‘capabilities approach’ as the most suitable theoretical framework for addressing these questions. Since industrialization economic growth has played a key-role as an attraction pole, around which issues of social justice, political stability, and welfare protection seemed to gravitate. Accordingly, it is considered as a necessary condition for both intragenerational and intragenerational justice. These assumptions have been subjected to substantial critique by degrowth-thinkers, according to which economic growth is rather a threat than a condition for intragenerational and intergenerational justice. However, a theoretical underpinning of these assumptions is missing so far. In the paper I analyze the ethical and moral assumptions in both approaches by focusing on the theories of justice that are implicitly laid down as a background for their arguments (welfarism, resourcism, and the capabilities-approach). In a detailed analysis of the main critical points formulated by degrowth advocates I take the capabilities approach perspective and show why it can offer a more adequate normative underpinning for the conceptualization of a degrowth society.     

Corporate bond returns and the financial crisis

We examine effects of government actions and related accounting policies on the corporate bond market implied by changes in relations between aggregate bond returns and cash flow and discount rate news. We capture the influence of risk by partitioning bonds into investment and speculative grades. We use earnings changes as a proxy for cash flow news and T-Bill rate changes as a proxy for discount rate news. As expected, during non-crisis periods, we observe a positive relation between earnings changes and bond returns and a negative relation for T-Bill rate changes. A combination of government bailouts of large financial institutions and mark-to-market accounting preserves the positive relation for earnings changes during the crisis for investment grade bonds, while absence of these factors leads to an insignificant relation for speculative grade. Intervention by the Federal Reserve to induce lower interest rates as earnings were declining, a flight to safety shifting demand from corporate bonds to T-Bills, and low cost funds invested in risk free investments explain a reversal of the relation between bond returns and T-Bill rate changes for both grades.     

A theory of relativity in restructuring developed with the Coase Theorem

This article addresses a key topic in restructuring law, namely the alternative legislative rules for setting priorities for payments and rights among stakeholders in a statutory restructuring programme. The EU Member States have now implemented the Restructuring Directive (2019/1023), which gives two options for the priority rules and the outcomes of the new laws seem to vary significantly. As this legislation is important also for the efficiency of the capital markets, it is good to investigate the potential impacts the new legislative structures may bring for the process. In the article the author argues, by using the Coase Theorem, a leading theory in law and economics, that wider powers for a court to consider the interests of all parties in restructuring could be a preferable legislative solution to restructuring law. It would protect generally the creation of a restructuring surplus, as an individual class would be unable to use its rights as a tool for gaining further benefits. Relativity would stimulate the bargaining of property rights in the process and would follow the Coase Theorem, according to which bargaining between individuals or groups related to property rights will lead to an optimal and efficient outcome.     

Calculation of ruin probabilities for a dense class of heavy tailed distributions

In this paper, we propose a class of infinite-dimensional phase-type distributions with finitely many parameters as models for heavy tailed distributions. The class of finite-dimensional phase-type distributions is dense in the class of distributions on the positive reals and may hence approximate any such distribution. We prove that formulas from renewal theory, and with a particular attention to ruin probabilities, which are true for common phase-type distributions also hold true for the infinite-dimensional case. We provide algorithms for calculating functionals of interest such as the renewal density and the ruin probability. It might be of interest to approximate a given heavy tailed distribution of some other type by a distribution from the class of infinite-dimensional phase-type distributions and to this end we provide a calibration procedure which works for the approximation of distributions with a slowly varying tail. An example from risk theory, comparing ruin probabilities for a classical risk process with Pareto distributed claim sizes, is presented and exact known ruin probabilities for the Pareto case are compared to the ones obtained by approximating by an infinite-dimensional hyper-exponential distribution.     

Health benefits--reimbursement--state law claim not preempted. Providence Health Plan v. McDowell

A claim to enforce a reimbursement provision or a separate promise to reimburse a plan out of recovery from a responsible third party cannot be brought in federal court under ERISA, because it is a legal claim for monetary damages and ERISA allows fiduciaries to bring suit only for equitable relief However, a claim for reimbursement of medical benefits paid from a third-party settlement is a state law breach-of-contract claim that cannot be removed to federal court and is not preempted by ERISA. Thus, a plan can bring an action in state court for breach of contract against a participant or beneficiary who fails to reimburse the plan for medical benefits paid when he or she recovers from a third party in a settlement or through a judgment, as required by a reimbursement provision in the plan and/or a separate reimbursement agreement.     

Intra Day Bid‐Ask Spreads, Trading Volume and Volatility: Recent Empirical Evidence from the London Stock Exchange

With the benefit of very high frequency (25 million 1 minute observations) and recent data (2001) for the UK, this paper explores a number of intra day patterns of stock market behaviour. More specifically, a distinct reverse J shaped bid‐ask spread pattern is noted for SETS securities, a declining bid‐ask spread pattern for non‐SETS securities, a two hump pattern for trading volume and a U‐shaped pattern for returns volatility for all securities. In terms of complementing the existing literature, the paper shows that differences in trading systems may affect the bid‐ask spread patterns, while differences in market environments (i.e. US and UK markets) seems to affect the trading volume pattern. The paper suggests avenues for future research, in particular, the need to consider what factors are significant in determining intra day patterns for different trading systems and the need for additional cross‐market comparisons to identify how institutional factors affect the behaviour of investors on an intra day basis.     

Testing for structural breaks in correlations: Does it improve Value-at-Risk forecasting?

In this paper, we modify the Constant Conditional Correlation (CCC) model and its dynamic counterpart, the Dynamic Conditional Correlation (DCC) model by combining them with a pairwise test for constant correlations, a test for a constant correlation matrix, and a test for a constant covariance matrix. We compare these models to their plain counterparts with respect to the accuracy for forecasting the Value-at-Risk of financial portfolios by a set of distinct backtests. In an empirical horse race of these models based on multivariate portfolios, our study shows that correlation models can be improved by approaches modified by tests for structural breaks in co-movements in several settings.