Valuation, optimal asset allocation and retirement incentives of pension plans

We provide a framework in which we link the valuation and assetallocation policies of defined benefits plans with the lifetimemarginal productivity schedule of the worker and the pensionplan formula. In turn, we examine the retirement policies thatare implied by the primitives of the model and the value ofpension obligations. Our model provides an explicit valuationformula for a stylized defined benefits plan. The optimal assetallocation policies consist of the replicating portfolio independentof the pension liabilities. We show that the worker with retirewhen the ratio of pension benefits to current wages reachesa critical value which depends on the parameters of the pensionplan and the discount rate. Using numerical techniques we analyzethe feedback effect of retirement policies on the valuationof plans and on the asset allocation decisions.     

GENERAL EQUILIBRIUM WITH CONSTANT RELATIVE RISK AVERSION AND VASICEK INTEREST RATES1

We consider a pure exchange economy consisting of a single risky asset whose dividend drift rate is modeled as an Omstein-Uhlenbeck process, and a representative agent with power-utility who, in equilibrium, consumes the dividend paid by the risky asset. Endogenously determined interest rates are found to be of the Vasicek (1977) type the mean and variance of the equilibrium stock price are stochastic and have mean-reverting components A closed-form solution for a standard call option is determined for the case of log-utility. Equilibrium values have interesting implications for the equity premium puzzle observed by Mehra and Prescott (1985)     

Analytic Pricing of Employee Stock Options

We introduce a model that captures the main properties thatcharacterize employee stock options (ESO). We discuss the likelihoodof early voluntary ESO exercise, and the obligation to exerciseimmediately if the employee leaves the firm, except if thishappens before options are vested, in which case the optionsare forfeited. We derive an analytic formula for the price ofthe ESO and in a case study compare it to alternative methods.     

Motivations of educational tourists in non-English-speaking countries: the role of languages

ABSTRACT

Learning a language or improving one’s foreign language skills may be a key motivator for students to decide to participate in an exchange program as well as choose the destination for their studies. Nevertheless, studies on educational tourism are limited, and there is no research on the motivations of students visiting non-English-speaking countries. To fill this gap, this paper aims to examine the motivations of university students in non-English-speaking destinations by using the push-and-pull framework. Primary data were collected through an online survey from 190 and 205 students who participated in mobility programs in a Spanish university and in a German university respectively. Empirical findings reveal that languages are a key motivating factor for either growing personally through cultural enrichment, or growing professionally. Furthermore, these data allow generic recommendations so that the destinations can attract a larger number of international students.     

Classical and Impulse Stochastic Control of the Exchange Rate Using Interest Rates and Reserves

We consider the problem of a Central Bank that wants the exchange rate to be as close as possible to a given target, and in order to do that uses both the interest rate level and interventions in the foreign exchange market. We model this as a mixed classical‐impulse stochastic control problem, and provide for the first time a solution to that kind of problem. We give examples of solutions that allow us to perform an interesting economic analysis of the optimal strategy of the Central Bank.     

Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations

We derive a closed-form solution for the optimal portfolio ofa nonmyopic utility maximizer who has incomplete informationabout the alphas or abnormal returns of risky securities. Weshow that the hedging component induced by learning about theexpected return can be a substantial part of the demand. Usingour methodology, we perform an "ex ante" empirical exercise,which shows that the utility gains resulting from optimal allocationare substantial in general, especially for long horizons, andan "ex post" empirical exercise, which shows that analysts’recommendations are not very useful. (JEL C61, G11, G24)     

Optimal Consumption-Portfolio Policies With Habit Formation1

This is a companion paper to the authors ‘Asset Prices in an Exchange Economy with Habit Formation” in Econometrica which focuses on consumption demand and asset pricing when preferences are habit forming. Here we prove existence of optimal consumption-portfolio policies for (i) utility functions for which the marginal cost of consumption (MCC) interacts with the habit formation process and satisfies a recursive integral equation with forward functional Lipschitz integrand and (ii) utilities for which the MCC is independent of the standard of living and satisfies a recursive integral equation with locally Lipschitz integrand. Result (i) is demonstrated here for the first time. Result (ii) is novel and enables us to consider Cobb-Douglas utilities without placing lower bounds on the system of Arrow-Debreu prices. We also review and extend our earlier results in the linear case; in particular, we provide new insights about the structure of optimal portfolios. Additional new features of the model include the possibility of finite marginal utility of consumption at zero and habit formation mechanisms with stochastic coefficients. an extension to a financial market model with general processes is outlined. A byproduct of the analysis is a set of fixed-point theorems for recursive integral equations with forward functional Lipschitz or locally Lipschitz integrands.     

The impact of daily tour service quality on tourist satisfaction and behavioural intentions in an island context: a study on tours to Isla de la Plata,Ecuador

ABSTRACT

This study assesses the impact of daily tour service quality on tourist satisfaction and behavioural intentions in an island context. Using Partial Least Squares Structural Equation Modeling (PLS-SEM), the analysis of data collected from 195 participating in a daily tour to Isla de la Plata (Ecuador) showed that all the services examined (transportation by boat, food and beverage, tourist guide and visits) had a significant direct impact on tour satisfaction, having the transportation the highest impact. Moreover, the indirect effect of the daily tours services on behavioural intentions mediated by the satisfaction with the tour was also significant.     

Asset pricing implications of benchmarking: a two-factor CAPM

The paper considers the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modelled as the maximization of expected utility (an increasing and concave function, in order to accommodate risk aversion) of final wealth minus a benchmark. In equilibrium this optimal strategy gives rise to the two-beta CAPM: together with the market beta a new risk-factor (termed active management risk) is brought into the analysis. This new beta is defined as the normalized (to the benchmark's variance) covariance between the asset excess return and the excess return of the market over the benchmark index. The empirical test supports the model's predictions. The cross-section return on the active management risk is positive and significant, especially after 1990, when institutional investors became the representative agent of the market.     

Optimal portfolio allocation with higher moments

We model the risky asset as driven by a pure jump process, with non-trivial and tractable higher moments. We compute the optimal portfolio strategy of an investor with CRRA utility and study the sensitivity of the investment in the risky asset to the higher moments, as well as the resulting wealth loss from ignoring higher moments. We find that ignoring higher moments can lead to significant overinvestment in risky securities, especially when volatility is high.