A market-consistent framework for the fair evaluation of insurance contracts under Solvency II

Decisions in Economics and Finance - The entry into force of the Solvency II regulatory regime is pushing insurance companies in engaging into market consistence evaluation of their balance sheet,...     

Sequential conditional correlations: Inference and evaluation

This paper presents a new approach to the modeling of conditional correlation matrices within the multivariate GARCH framework. The procedure, which consists of breaking the matrix into the product of a sequence of matrices with desirable characteristics, in effect converts a highly dimensional and intractable optimization problem into a series of simple and feasible estimations. This in turn allows for richer parameterizations and complex functional forms for the single components. An empirical application involving the conditional second moments of 69 selected stocks from the NASDAQ100 shows how the new procedure results in strikingly accurate measures of the conditional correlations.     

Cross-border commuting and consuming: an empirical investigation

This article contributes to our understanding of cross-border activity in general and the determinants of cross-border trade in particular by focusing on the part of cross-border sales that arise due to work-related cross-border crossings of households. We analyse empirically how cross-border consumption expenditures vary across product and services categories as well as household characteristics using representative household survey data of cross-border commuters to Luxembourg. In total, these households spend an estimated 17% of their gross annual income across the border, contributing about 10% to the total household final consumption expenditure (HFCE) in Luxembourg. Cross-border expenditure is linked to individual- and household-related characteristics and to distance between home and work. Cross-border commuters systematically exploit arbitrage opportunities that arise because of existing price level (index) differences between the country of work and the country of residence.     

Brand-specific tastes for quality

This paper develops a model of nonlinear pricing with competition. The novel element is that each consumer's willingness to pay for quality is private information and is allowed to differ across brands. The consumer's preferences are represented by a multidimensional type containing the marginal value of quality for different products. Buyers with high willingness to pay for quality also display strong preferences for particular brands, and require higher discounts in order to switch away from their favorite product. Therefore, competition is fiercer for buyers with lower tastes for quality, and hence more elastic demands. This is in sharp contrast to earlier models in which competition is fiercer for higher-taste, more valuable buyers. In equilibrium, firms either compete intensively for the entire market (providing strictly positive rents to all consumers) or shut down the least profitable segment of the market. Quality levels are distorted downwards for all buyers, except for those with the highest type. The number of competing firms and the degree of correlation across brand preferences enhance the efficiency of the allocation.     

Marketing metrics: Insights from Brazilian managers

This study examines how managers approach marketing measures in a Brazilian context. Using data from a large-scale empirical study in Brazil, we focus on managers' views of the practices in marketing measurement and identify which indicators they emphasize. The findings, which reflect Brazilian managerial practice, indicate that managers use a combination of metrics. Items such as total number of customers, number of complaints, and customer satisfaction are among the most known and most used metrics. When addressing the 10 most relevant metrics results yield 4 groups, including customer vision, financial, product vision, and market and innovation. Indicators pertaining to customer vision are the most important to Brazilian managers. Furthermore, we discuss the results and draw comparisons with similar studies conducted in the United Kingdom and China. Finally, we present conclusions and avenues for future research.     

Intra-regional trade and business cycles in Southeast Asia

Conclusion In this note we considered the relationship between trade integration and the cross-country correlation of business cycle activity in southeast Asia. We found a positive and significant relationship between the degree of bilateral trade intensity and the cross-country bilateral correlation of business activity over the period 1986–1996, a period when trade integration was proceeding rapidly. Thus, the Frankel and Rose (1997) finding that more trade integration between industrialized countries tends to result in more highly synchronized business cycles, appears to be robust to a sample of countries which have diverse income levels and economic structures and are likely to have less bilateral intraindustry trade.     

Bennet Woodcroft and the value of English patents, 1617–1841

We examine the potentialities of a new indicator measuring the value of English patents in the period 1617–1841. The indicator is based on the relative visibility of each individual patent in the contemporary technical and legal literature as summarized in Bennet Woodcroft's Reference Index of Patents of Invention. We conclude that the indicator provides a reasonable proxy for the value of patents and that it can be usefully employed to shed light on the timing and scope of innovation during the Industrial Revolution. In particular, our indicator offers a suitable reconciliation between the patent records evidence and the Crafts–Harley view of the Industrial Revolution.     

Differentiating Indexation in Dutch Pension Funds

Funded social security programs are particularly vulnerable to economic and financial market shocks. As a consequence of the recent crisis, a large fraction of the Dutch pension funds had to submit restoration plans for the recovery of their buffers. Such plans will have to rely primarily on a mix of reduced benefit indexation and increased pension contributions. Hence, a discussion has emerged whether indexation should be differentiated across the various groups of participants in a pension fund. We investigate this issue numerically, developing an applied many-generation small open-economy OLG model with heterogeneous agents. The pension system consists of a first-pillar PAYG component and a second pillar with a pension fund. In our stochastic simulations, we hit the economy with a variety of unexpected demographic, economic and financial shocks. We compare uniform indexation of pension rights across all fund participants with alternatives such as status-contingent indexation in which pensions are protected against price inflation. While the aggregate welfare consequences are small, group-specific consequences are more substantial with the workers and future born losing and retirees benefitting from a shift away from uniform indexation. The exception is a scheme which links indexation directly to the fund’s asset performance. Under this scheme the retired benefit without other groups losing. The welfare effects are primarily the result of systematic welfare redistributions rather than of shifts in the benefits of risk sharing. Contribution rates always have to rise substantially from their initial levels to maintain the system’s sustainability. An increase in the retirement age that leaves existing pension rights untouched does little to avoid this rise with its adverse labour market consequences.     

Macroeconomic adjustment programmes in the euro area: an overall assessment

Since the start of EMU (Economic and Monetary Union), the euro area, and more broadly the global economy, experienced an unprecedented credit boom. The expansion of credit was particularly strong in Greece, Ireland, Portugal and Cyprus and all of them subsequently needed official financial support. In each of the four programmes, financial assistance has been provided and promised against the commitment of each country to fulfil certain economic policy conditions contained in the macroeconomic adjustment programme. In general, a macroeconomic adjustment is a process driven by policies but also by changes in private spending behaviour (consumption, imports, investment) and improvement in competitiveness that countries are required to undertake after a large shock. In the case of the four countries, the shock emerged as a consequence of an excessive accumulation of imbalances in different parts of the economy: in the public sector in Greece, in the housing and banking sectors in Ireland, external imbalances in Portugal and in the banking sector in Cyprus. The paper looks at the feasibility of the fiscal adjustment comparing the macroeconomic conditions in the four countries and emphasising the role of the fiscal multipliers in the process. It also assesses the fall in the output in a comparative framework, stressing the role played by the different components of demand either in amplifying the effect of the fiscal consolidation or in offsetting it. In addition, it considers formulation of the programmes as well as their implementation with most attention devoted to reforms aiming at improving competitiveness, growth and employment in the framework of a cross-country approach.