Optimal consumption,portfolio and life insurance rules for an uncertain lived individual in a continuous time model

A continuous time model for optimal consumption, portfolio and life insurance rules, for an investor with an arbitrary but known distribution of lifetime, is derived as a generalization of the model by Merton (1971). The classic Tobin-Markowitz separation theorem obtains with the mutual funds being identical to those obtained under the assumption of certain lifetime. The investor is found to have a ‘human capital’ component of wealth, which is independent of his preferences and risky market opportunities and represents the certainty equivalent of his future net (wage) earnings. Explicit solutions, which are linear in wealth, are found for the investor with constant relative risk aversion.     

Optimal portfolio and spending rules for endowment funds

Review of Quantitative Finance and Accounting - Prior studies show that investor learning about earnings-based return predictors from academic research erodes return predictability. However, the...     

Optimal hedging of uncertain and long-term foreign exchange exposure

This paper employs stochastic dynamic programming to analyze two hedging problems which arise frequently, especially in international finance. One is the hedging of an uncertain exposure when the arrival of new information is anticipated. It is shown that a risk-averse agent will hedge a fraction of his maximum potential exposure to reduce risk. The second problem concerns hedging an exposure which extends beyond the delivery date of the available forward contract. The solution yields a rule by which successive contracts can be linked to form an optimal hedging strategy. A short empirical study illustrates this rule.     

Optimal simple and implementable monetary and fiscal rules

Welfare-maximizing monetary- and fiscal-policy rules are studied in a model with sticky prices, money, and distortionary taxation. The Ramsey-optimal policy is used as a point of comparison. The main findings are: the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Optimal monetary policy features a muted response to output. Interest-rate rules that feature a positive response to output can lead to significant welfare losses. The welfare gains from interest-rate smoothing are negligible. Optimal fiscal policy is passive. The optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey-optimal policy.     

Optimal life insurance purchase and consumption/investment under uncertain lifetime

In this paper, we consider optimal insurance and consumption rules for a wage earner whose lifetime is random. The wage earner is endowed with an initial wealth, and he also receives an income continuously, but this may be terminated by the wage earner’s premature death. We use dynamic programming to analyze this problem and derive the optimal insurance and consumption rules. Explicit solutions are found for the family of CRRA utilities, and the demand for life insurance is studied by examining our solutions and doing numerical experiments.     

Financing uncertain growth

We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.     

The spatial demand for housing with uncertain quality

This article extends the models of household location and the spatial housing market to examine the impact of uncertain housing quality on the demands for housing and location and the spatial characteristics of the housing price and consumption gradients. The well-known basic predictions of the certainty models remain qualitatively unaltered: equilibrium housing price is still decreasing convex, and (planned) housing consumption increases with commuting distance. Quality risk by itself, though, is seen to reduce the demand for housing and increase the demand for CBD proximity in the location choice model and decrease the equilibrium housing price at all locations in the competitive spatial housing market. The effect of quality risk on the consumption gradient comprises two offsetting effects arising from the increase in risk and the decrease in equilibrium housing price.     

Simple rules for making alliances work

Corporate alliances are growing in number--by about 25% a year--and account for up to a third of revenues and value at many companies. Yet some 60% to 70% of them fail. What is going wrong? Because alliances involve interdependence between companies that may be competitors and may also have vastly different operating styles and cultures, they demand more care and handling than other business arrangements, say Hughes and Weiss, management consultants at Vantage Partners. The authors have developed five principles--based on their two decades of work with alliances -to complement the conventional advice on alliance management: (1) Focus less on defining the business plan and more on how you and your partner will work together. (2) Develop metrics pegged not only to alliance goals but also to performance in working toward them. (3) Instead of trying to eliminate differences, leverage them to create value. (4) Go beyond formal systems and structures to enable and encourage collaborative behavior. (5) Be as diligent in managing your internal stakeholders as you are in managing the relationship with your partner. Companies that have adopted these principles have radically improved their alliance success rate. Schering-Plough, for example, engages in a systematic "alliance relationship launch": four to six weeks of meetings at which the partners explore potential challenges, examine key differences and develop shared protocols for managing them, and establish mechanisms for day-to-day decision making. Blue Cross and Blue Shield of Florida measures the quality of alliance progress through regular surveys of both its own staff and its partners'. These companies have learned that the conventional advice is not so much wrong as incomplete. The five simple rules can help fill in the blanks.     

Six rules for accurate effective forecasting

The primary goal of forecasting is to identify the full range of possibilities facing a company, society, or the world at large. In this article, Saffo demythologizes the forecasting process to help executives become sophisticated and participative consumers of forecasts, rather than passive absorbers. He illustrates how to use forecasts to at once broaden understanding of possibilities and narrow the decision space within which one must exercise intuition. The events of 9/11, for example, were a much bigger surprise than they should have been. After all, airliners flown into monuments were the stuff of Tom Clancy novels in the 1990s, and everyone knew that terrorists had a very personal antipathy toward the World Trade Center. So why was 9/11 such a surprise? What can executives do to avoid being blind-sided by other such wild cards, be they radical shifts in markets or the seemingly sudden emergence of disruptive technologies? In describing what forecasters are trying to achieve, Saffo outlines six simple, commonsense rules that smart managers should observe as they embark on a voyage of discovery with professional forecasters. Map a cone of uncertainty, he advises, look for the S curve, embrace the things that don't fit, hold strong opinions weakly, look back twice as far as you look forward, and know when not to make a forecast.     

Stop-loss ordering for scale and power mixtures of distributions

Abstract

It is the custom to introduce mixtures of distributions for explaining non-obvious variations in observed outcomes from a collective of risks. In the present contribution we consider some special kind of mixtures, namely scale and power mixtures. It is shown that the stop-loss criterion for ordering of risks plays an important role for ordering the mixing distribution.     

Computerized stock screening rules for portfolio selection

Recent studies have uncovered several systematic patterns that increase the probability that individual investors can select stock portfolios with excess returns. This study tests the feasibility of using a commercially available computerized stock screening program for investors to take advantage of these patterns. The screening program searches the three major exchanges and selects stocks on both fundamental and technical indicators: low price-to-sales ratio, small firm size, accelerating stock prices above their 50 day moving average, high trading volume, and high earnings growth. Of the 18 models tested between 1994 and 1998, those that allow for selection between exchanges yield portfolio returns that significantly exceed the average market indices.     

中国银行卡产业回顾与展望

2008年银行卡产业回顾 2008年,在人民银行及有关部门的领导下,经过商业银行、商户、持卡人和中国银联以及社会各有关方面的共同努力,我国银行卡产业克服国际金融危机的影响,继续保持快速健康发展的良好势头,各方面都取得了很大成绩.概括起来,呈现六个方面的特点.     

Marketing rules

New research shows that the top-performing dot-coms aren't necessarily the ones with the best business models--they're the ones with the quickest, most responsive marketing.     

Optimal investment for insurers

We consider a stochastic model for the wealth of an insurance company which has the possibility to invest into a risky and a riskless asset under a constant mix strategy. The total insurance claim amount is modeled by a compound Poisson process and the price of the risky asset follows a geometric Brownian motion. We investigate the resulting integrated risk process and the corresponding discounted net loss process. This opens up a way to measure the risk of a negative outcome of the integrated risk process in a stationary way. We provide an approximation of the optimal investment strategy, which maximizes the expected wealth under a risk constraint on the Value-at-Risk.     

The new rules for bringing innovations to market

It's tough to get consumers to adopt innovations--and it's getting tougher all the time. That's because more and more markets are taking on the characteristics of networks. The interconnections among today's companies are so plentiful that often a new product's adoption by one player depends on its systematic adoption by other players. Consider the disparate companies involved with the popularization of digital photography: software vendors, camera manufacturers, broadband communications companies, printer manufacturers, and so on. By contrast, Kodak was pretty much the sole player involved with popularizing film photography. The traditional levers executives use to launch products--such as targeting unique customer segments or developing compelling value propositions--don't work as well in this new environment. Instead, innovators must orchestrate a change of behaviors across the market, unraveling the status quo so that a large number of players adopt their offerings and believe they are better off for having done so. In this article, Monitor Group's Bhaskar Chakravorti outlines a four-part framework for doing just that. The innovator must reason back from a target endgame, implementing only those strategies that maximize its chances of getting to its goal. It must complement power players, positioning its innovation as an enhancement to their products or services. The innovator must offer coordinated switching incentives to three core groups: the players that add to the innovation's benefits, the players that act as channels to adopters, and the adopters themselves. And it must preserve flexibility in case its initial strategy fails. Chakravorti uses Adobe's introduction of its Acrobat software as an example of an innovator that took into account other players in the network--and succeeded because of it.     

Designing targeting rules for international monetary policy cooperation

This study analyzes a two-country dynamic general equilibrium model with nominal rigidities, monopolistic competition and producer currency pricing. A quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers.It is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained-efficient solution depend on the kind of disturbance that affects the economy. Despite this result, simple targeting rules that involve only targets for the growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation.     

On syndicate sharing rules for unanimous project rankings

This paper extends the notion of individual certainty equivalent to group certainty equivalent, in order to derive sharing rules that ensure unanimity on project rankings within a syndicate. A constrained maximization problem is set up with optimal project-specific sharing rules as the solution. It is shown that the group certainty equivalent construct allows for experimental derivation of a syndicate's preference function from a procedure parallel to that presently employed for deriving preference functions of individuals. The analysis potentially has a role in examining the nature of optimal compensation systems (sharing rules) for closely held (non-traded) corporations and partnerships.