HARA utility maximization in a Markov-switching bond–stock market

We present a flexible multidimensional bond–stock model incorporating regime switching, a stochastic short rate and further stochastic factors, such as stochastic asset covariance. In this framework we consider an investor whose risk preferences are characterized by the hyperbolic absolute risk-aversion utility function and solve the problem of optimizing the expected utility from her terminal wealth. For the optimal portfolio we obtain a constant-proportion portfolio insurance-type strategy with a Markov-switching stochastic multiplier and prove that it assures a lower bound on the terminal wealth. Explicit and easy-to-use verification theorems are proven. Furthermore, we apply the results to a specific model. We estimate the model parameters and test the performance of the derived optimal strategy using real data. The influence of the investor’s risk preferences and the model parameters on the portfolio is studied in detail. A comparison to the results with the power utility function is also provided.     

Optimal tax policy and expected longevity: a mean and variance utility approach

This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, a two-period model is developed, where agents’ preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some sensitivity to what Allais (Econometrica 21(4), 503–546, 1953) calls the ‘dispersion of psychological values’. It is shown that if agents ignore the impact of health spending on the return of their savings, the decentralization of the first-best utilitarian optimum requires intergroup lump sum transfers and group-specific positive taxes on health spending. Under asymmetric information, a differentiated taxation across agents is still required, but subsidizing health spending may be optimal as a way to solve the incentive problem.     

Trade and domestic tax reforms in the presence of a public good and different neutrality conditions

This paper develops a perfectly competitive general-equilibrium model of a small open economy with production of private traded goods and of a public good which is financed by revenues from trade and domestic taxes. Within this framework we consider the effects on public good provision and on welfare of the following tax reforms: (i) a producer-price-neutral reduction in export taxes and a corresponding increase in production taxes, (ii) a consumer-price-neutral reduction in tariffs and a corresponding increase in consumption taxes, and (iii) a partial tax-revenue-neutral reform in trade and domestic taxes.     

Small-time ruin for a financial process modulated by a Harris recurrent Markov chain

We consider a nonstandard ruin problem where: (i) the increments of the process are heavy-tailed and Markov-dependent, modulated by a general Harris recurrent Markov chain; (ii) ruin occurs when a positive boundary is attained within a sufficiently small time. Our main result provides sharp asymptotics for the small-time probability of ruin, viz., P(sup? _{n≤δ u} S _n ≥u), where {S _n } denotes the discrete partial sums of the process and δ∈(0,1/μ), where μ is the mean drift. We apply our results to obtain risk estimates which quantify, e.g., repetitive operational risk losses or the extremal behavior for a GARCH(1,1) process.     

FDI determination and corporate tax competition in a volatile world

This paper investigates the impact of economic and political volatility on corporate tax rates on a large dataset of countries over the 1983–2003 period. Estimation of a dynamic tax rate equation supports the hypothesis that economic volatility negatively affects statutory corporate tax rates, while political volatility has no significant effect. In order to identify the channels through which volatility works, we estimate a structural model allowing for simultaneous determination of corporate tax rates and FDI inflows, and find that economic volatility affects the corporate tax setting process through its impact on FDI inflows.     

The Minimal Entropy Martingale Measure (MEMM) for a Markov-Modulated Exponential Lévy Model

This paper deals with the characterization problem of the minimal entropy martingale measure (MEMM) for a Markov-modulated exponential Lévy model. This model is characterized by the presence of a background process modulating the risky asset price movements between different regimes or market environments. This allows to stress the strong dependence of financial assets price with structural changes in the market conditions. Our main results are obtained from the key idea of working conditionally on the modulator-factor process. This reduces the problem to studying the simpler case of processes with independent increments. Our work generalizes some previous works in the literature dealing with either the exponential Lévy case or the exponential-additive case.     

A stochastic control problem with delay arising in a pension fund model

This paper deals with the optimal control of a stochastic delay differential equation arising in the management of a pension fund with surplus. The problem is approached by the tool of a representation in infinite dimension. We show the equivalence between the one-dimensional delay problem and the associated infinite-dimensional problem without delay. Then we prove that the value function is continuous in this infinite-dimensional setting. These results represent a starting point for the investigation of the associated infinite-dimensional Hamilton–Jacobi–Bellman equation in the viscosity sense and for approaching the problem by numerical algorithms. Also an example with complete solution of a simpler but similar problem is provided.     

The challenge of a rising skill premium for redistributive taxation

The present paper analyzes the challenge to redistribution programs posed by an increase in the skill premium. The skill premium affects both the profitability of education and the profitability of migration. We propose a two country, median voter model, where the equilibrium tax policy is shaped by the desire of the median voter to promote skill formation and to avoid emigration of skilled individuals. Our paper shows that the effect of an increase in the skill premium on redistributive programs depends on the initial level of the skill premium. Below a critical level, an increase in the skill premium is met by an increase in the tax rate. Beyond this level, however, a further rise in the skill premium leads to a fall in the tax rate, and hence a sharp increase in post-tax inequality.     

MDP algorithms for portfolio optimization problems in pure jump markets

We consider the problem of maximizing the expected utility of the terminal wealth of a portfolio in a continuous-time pure jump market with general utility function. This leads to an optimal control problem for piecewise deterministic Markov processes. Using an embedding procedure we solve the problem by looking at a discrete-time contracting Markov decision process. Our aim is to show that this point of view has a number of advantages, in particular as far as computational aspects are concerned. We characterize the value function as the unique fixed point of the dynamic programming operator and prove the existence of optimal portfolios. Moreover, we show that value iteration as well as Howard’s policy improvement algorithm works. Finally, we give error bounds when the utility function is approximated and when we discretize the state space. A numerical example is presented and our approach is compared to the approximating Markov chain method.      

The critical price for the American put in an exponential Lévy model

This paper considers the behavior of the critical price for the American put in the exponential Lévy model when the underlying stock pays dividends at a continuous rate. We prove the continuity of the free boundary and give a characterization of the critical price at maturity, generalizing a recent result of S.Z. Levendorskiǐ (Int. J. Theor. Appl. Finance 7:303–336, 2004).      

Wearables – a new chance for private insurance companies from the underwriting view

Wearables are small personal minicomputers for the registration of biometric and medical data. Using this information, the insurance industry hope to get new sales possibilities of new products. The underwriting procedure will be facilitated. The possibilities of these modern devices are presented and open questions are discussed. The future use of Big data offers different chances for the insurance industry.     

Accounting for preference dependency in target costing – a note

Review of Quantitative Finance and Accounting - Target costing is a well-established strategic cost management tool in theory and practice. The original target costing model implies independence of...     

Minimal <Emphasis Type="Italic">q</Emphasis>-entropy martingale measures for exponential time-changed Lévy processes

We consider structure preserving measure transforms for time-changed Lévy processes. Within this class of transforms preserving the time-changed Lévy structure, we derive equivalent martingale measures minimizing relative q-entropy. They combine the corresponding transform for the Lévy process with an Esscher transform on the time change. Structure preservation is found to be an inherent property of minimal q-entropy martingale measures under continuous time changes, whereas it imposes an additional restriction for discontinuous time changes.     

Foresight education in Australia—Time for a hybrid model?

This paper revisits the original design parameters of what was a ‘new’ Masters in Strategic Foresight that commenced at Swinburne University in 2001. It explores which of the original purposes and assumptions have stood the test of time over the course of a decade and analyses how the course has evolved, partly through design and partly through necessity. The paper reflects on the primary contribution of the Masters teaching experience and proposes that encouraging the students to develop philosophical ‘literacy’ operated to develop both the practicality of their use of methods and the capacity of their leadership and critical thinking. A secondary contribution reiterates the importance of ‘place’ and the necessity of ‘sufficient time’ for adult development to occur.     

Is Dual Agency in Real Estate a Cause for Concern?

We examine the effects of the regulation of dual agency in residential real estate transactions, for 10,888 transactions in Long Island, New York in 2004–2007. We find that dual agency has an overall null effect on sale price, but includes two opposing forces where buyer and seller interests might be compromised. The link between dual agency and timing of sales is less clear. These findings are robust to endogeneity bias. Although it appears dual agency does cause some market distortions, our analysis yields little evidence that prohibiting dual agency in real estate will increase welfare.     

A principal component model for forecasting age- and sex-specific survival probabilities in Western Europe

The assessment of future mortality is of high importance in many areas where the allocation of future resources has to be planned in time, especially in social security and private life insurance. This contribution represents an extension of the classic forecasting approaches of Bell–Monsell and Lee–Carter. Based on a forecast of the first two principal components, age- and sex-specific survival probabilities for 18 Western European countries are predicted simultaneously until the year 2070. In addition to the correlations in the mortality trends between the age groups and the genders, international trends in mortality are captured as well. A major improvement in the classic Lee–Carter models is the adequate quantification of the uncertainty associated with the whole system of variables by stochastic simulation of all remaining principal components with simple time series models. The model’s easy applicability to further analyses is illustrated by forecasting the median life span as well as the resulting Gender Gap for Germany, France, and Italy.     

Accounting for privatisation in Africa? Reflections from a critical interdisciplinary perspective

The interrelation of privatisation and accounting constitutes a wide-ranging focus for research that is attractive from a critical theoretical and interdisciplinary perspective. A number of studies may be considered part of this focus in holding themselves out as types of evaluation of – or as an accounting, or accountability, for – privatisation. For us, the evaluation of privatisation programmes is properly a concern of critical accounting research and of those interested in the development of more holistic forms of accounting and auditing for appraisal, such as is envisaged in forms of social accounting and social auditing. Indeed the assessment of privatisation has been deemed within the ambit of the social audit movement. Privatisation in Africa is controversial. In today's context it is often integral to the particular form of the globalisation process and carries related ambiguities. Apparently something of a panacea for its advocates, it is problem-ridden for its critics. How should we account for privatisation in Africa? We promote the delineation of a holistic accounting evaluation model by reflecting on a critical review of research constituting accounts of privatisation in Africa. Of course such research, to the extent that it is holistic or comprehensive, would include attention to the mobilisation in context of various accountings as well as related practices of governance at micro- and macro-levels—in turn reflecting the sense in which accounting, along with related systems of governance, is pervasive in privatisation processes. While we find strengths in the research analysed and acknowledge its contribution, we point to deficiencies and gaps from a critical theoretical and interdisciplinary perspective. These gaps and deficiencies delimit policy discourse and praxis vis-à-vis privatisation in Africa and beyond. They also point to a more holistic accounting model of appraisal. We acknowledge the particularities of Africa, and indeed of the differing nations, cultures and regions of Africa, but also suggest the model's relevance not only for African contexts but beyond.     

What counts as a reasonable extent? – a systems approach for understanding fire safety in Sweden

Swedish legislation requires that any owner or user of a building maintain a reasonable level of fire protection measures to ensure the safety of all people located in the building. If a building, in the wake of a fire, in court is determined not to have had a reasonable fire protection, the blame will likewise be assigned to the building owner or user. Using the perspective of risk governance, this study aims at analysing how regulation and stakeholders interact to maintain a specific level of fire protection in hotels. The focus is on identifying problems and frictions that have emerged from the complex relationships, and differences of interests, between the different stakeholders. Based on a stakeholder analysis, 11 respondents were selected for an interview study. The main problems identified in the analysis are that there are ambiguities for the individual hotel owner to know whether her or his fire protection measures are reasonable according to the law, that the system has emerged without clear political goals, problems related to the process of local supervision, that the ambiguous situation gives rise to opportunities of other stakeholders to claim the definition of what counts as a reasonable extent, and the ethical problems associated with convicting a single individual for failure in a complex multi-actor system.     

New development: Budgetary accounting in Colombia—arguments for a much-needed reform

ABSTRACT

Public financial management reforms are needed in Colombia to integrate the accrual-based accounting system with budgets. This would remove the need to make accounting variations through deficit measurement and would supply better information about the impact of public policies on the country’s financial situation. This article briefly explains why Colombia needs to integrate its accounting and budgeting systems.