Chinese write-down bonds and bank capital structure

In this paper, we use a structural model to investigate a bank capital structure that contains deposits, straight bonds, Write-Down (WD) bonds and equity. We first explicitly give the default boundaries and the values of a deposit, straight bond, WD bond, equity and bank asset, and then use a numerical example to demonstrate the relations among leverage, deposits, WD bonds and bank value. Our results show that value-maximizing banks select the ratio of deposit, straight bond and WD debt so that endogenous default is consistent with exogenous bank closure. The bank increases its leverage by swapping both deposits and straight bonds for WD bonds. And the issuance of WD bonds not only reduces the expected bankruptcy loss and credit spread of straight bonds, but also improves the bank value. This indicates that WD bonds do help to stabilize banks. We also study the role of deposit insurance and the Chinese Financial Stability Bureau (FSB), and give a closed-form expression for the fair insurance premium. Lastly, to check the robustness of our results, we do the sensitivity analysis and investigate the effect of three sets of exogenous parameters on bank capital structure: WD parameters, bank business features, closure rules and insurance subsidy, and obtain some practically significant implications.     

新会计准则下寿险公司资产负债管理研究

资产负债管理是影响寿险公司经营成败的重要因素,其长期目标是经济价值最大化.在信息不对称的情况下,会计报表成为寿险公司实施资产负债管理的重要依据和管理内容.我国保险业实施新会计准则后,寿险公司资产与负债的计量方式发生重大变化,会计报表的波动性显著增加,对资产负债管理提出了严峻的挑战.本文研究了新会计准则对传统险、分红险和...     

Optimal insurance and reinsurance policies chosen jointly in the individual risk model

The paper studies the so-called individual risk model where both a policy of per-claim insurance and a policy of reinsurance are chosen jointly by the insurer in order to maximize his/her expected utility. The insurance and reinsurance premiums are defined by the expected value principle. The problem is solved under additional constraints on the reinsurer’s risk and the residual risk of the insured. It is shown that the solution to the problem is the following: The optimal reinsurance is a modification of stop-loss reinsurance policy, so-called stop-loss reinsurance with an upper limit; the optimal insurer’s indemnity is a combination of stop-loss- and deductible policies. The results are illustrated by a numerical example for the case of exponential utility function. The effects of changing model parameters on optimal insurance and reinsurance policies are considered.     

A semiparametric conditional capital asset pricing model

This paper proposes using a functional coefficient regression technique to estimate time-varying betas and alpha in the conditional capital asset pricing model (CAPM). Functional coefficient representation relaxes the strict assumptions regarding the structure of betas and alpha by combining the predictors into an index. Appropriate index variables are selected by applying the smoothly clipped absolute deviation penalty. In such a way, estimation and variable selection can be done simultaneously. Based on the empirical studies, the proposed model performs better than the alternatives in explaining asset returns and we find no strong evidence to reject the conditional CAPM.     

Optimal reinsurance under general law-invariant risk measures

In recent years, general risk measures play an important role in risk management in both finance and insurance industry. As a consequence, there is an increasing number of research on optimal reinsurance decision problems using risk measures beyond the classical expected utility framework. In this paper, we first show that the stop-loss reinsurance is an optimal contract under law-invariant convex risk measures via a new simple geometric argument. A similar approach is then used to tackle the same optimal reinsurance problem under Value at Risk and Conditional Tail Expectation; it is interesting to note that, instead of stop-loss reinsurances, insurance layers serve as the optimal solution. These two results highlight that law-invariant convex risk measure is better and more robust, in the sense that the corresponding optimal reinsurance still provides the protection coverage against extreme loss irrespective to the potential increment of its probability of occurrence, to expected larger claim than Value at Risk and Conditional Tail Expectation which are more commonly used. Several illustrative examples will be provided.     

An Empirical Investigation of the Demand for Bank‐Owned Life Insurance

Key employee life insurance in the banking industry is called bank‐owned life insurance (BOLI). Banks use BOLI to provide financial support to help reduce disruptions due to the death of a key executive and as a part of the executive compensation package. We investigate the characteristics of banks related to the amount of BOLI purchased. We find that BOLI purchases are positively related to bank size and leverage and negatively related to tax rates and employee salaries. We also find that BOLI purchases are related to bank ownership structure and profitability.     

Lifetime asset allocation with idiosyncratic and systematic mortality risks

This paper considers a lifetime asset allocation problem with both idiosyncratic and systematic mortality risks. The novelty of the paper is to integrate stochastic mortality, stochastic interest rate and stochastic income into a unified framework. An investor, who is a wage earner receiving a stochastic income, can invest in a financial market, consume part of his wealth and purchase life insurance or annuity so as to maximize the expected utility from consumption, terminal wealth and bequest. The problem is solved via the dynamic programming principle and the Hamilton–Jacobi–Bellman equation. Analytical solutions to the problem are derived, and numerical examples are provided to illustrate our results. It is shown that idiosyncratic mortality risk has significant impacts on the investor’s investment, consumption, life insurance/annuity purchase and bequest decisions regardless of the length of the decision-making horizon. The systematic mortality risk is largely alleviated by trading the longevity bond. However, its impacts on consumption, purchase of life insurance/annuity and bequest as well as the value function are still pronounced, when the decision-making horizon is sufficiently long.     

Solvency II – towards a new insurance supervisory system in the EU

This article describes the current state of affairs in the EU Solvency II project. The background and international context of the project is discussed, as well as the general outline of a future EU solvency system. In particular, several areas where further technical work is needed are outlined. These topics could provide interesting objects of study for professionals of actuarial sciences as well as to those of other related sciences.     

Information and capital asset pricing

Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect.     

Optimal capital structure and endogenous default

In a sequence of fascinating papers, Leland and Leland and Toft have investigated various properties of the debt and credit of a firm which keeps a constant profile of debt and chooses its bankruptcy level endogenously, to maximise the value of the equity. One feature of these papers is that the credit spreads tend to zero as the maturity tends to zero, and this is not a feature which is observed in practice. This defect of the modelling is related to the diffusion assumptions made in the papers referred to; in this paper, we take a model for the value of the firm's assets which allows for jumps, and find that the spreads do not go to zero as maturity goes to zero. The modelling is quite delicate, but it just works; analysis takes us a long way, and for the final steps we have to resort to numerical methods.     

Extending the capital asset pricing model: the reward beta approach

This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the capital asset pricing model (CAPM) and the Fama–French three‐factor model. In out‐of‐sample testing, both the CAPM and the three‐factor model are rejected. In contrast, the reward beta approach easily passes the same test. In robustness checks, the reward beta approach consistently outperforms both the CAPM and the three‐factor model.     

A structural framework for modelling contingent capital

This paper develops a structural model of contingent capital. In contrast to existing approaches we explicitly link the firm’s total payout to its cost of debt, leading to a total payout that is linear in—as opposed to proportional to—asset value. In the special case that asset value evolves as affine geometric Brownian motion we derive closed-form expressions for limiting (i.e. perpetual) bond values. The proposed model is flexible, so that it can be used to gauge the relative merits of different variations of contingent capital, and parsimonious, so that it is relatively easy to implement in practice. An empirical example using data from the Canadian banking sector is provided that illustrates how the model can generate insights into problems that are of interest to both regulators and issuers of contingent capital (e.g. what range of conversion prices would be consistent with regulatory guidelines, and how expensive is contingent debt over this range).     

印度农业再保险体系运行模式及其启示

作为新兴市场典型的市场化国家,印度高度重视农业保险发展,而农业再保险在印度农业保险体系中发挥了重要作用。印度农业再保险是典型的政府支持型模式,通过法律法规、政策手段以及市场机制建立了以国家再保险公司为基础的再保险体系,实现农业保险大灾风险的逐级分层分散。借鉴印度经验对完善我国农业再保险体系和建立财政支持下的农业保险大灾风险分散机制具有重要借鉴意义。     

Internal capital market efficiency and the diversification discount: The role of financial statement comparability

This paper investigates how financial statement comparability affects the efficiency of internal capital markets and diversification discounts in multi‐segment firms through monitoring mechanisms. Previous studies suggest that financial statement comparability improves transparency and reduces the cost of information processing, mitigating information asymmetry between managers and shareholders. Using measures of comparability and internal capital efficiency, we find that financial statement comparability has a strong positive influence on internal capital market efficiency. Further, we find that by improving the efficiency of internal capital markets, financial statement comparability indeed mitigates diversification discounts. Especially, the effect of financial statement comparability is more pronounced for firms with high information asymmetry or operating environment volatility. The results support our arguments that financial statement comparability enhances the efficiency of internal capital markets and increases firm value in diversified firms by mitigating agency problems via monitoring and corporate control mechanisms.     

Social capital and capital allocation efficiency

Based on the social norms and structural theories of social capital, this study examines the relationship between community social capital and the firms’ capital allocation efficiency. We hypothesize and find that the community social capital of a firm's headquarter area has a negative and statistically significant impact on its capital allocation inefficiency, which is robust to alternative proxies for community social capital and capital allocation inefficiency, propensity score matching and instrumental variable regressions. In addition, we find that the effect of community social capital is more pronounced for firms with poor internal ethical culture and weak network connections to outside executives and directors, implying that community social capital becomes important in these situations. This finding links prior social norms and networks literature to capital allocation studies in that the norms and networks components of community social capital discipline self-interested managers’ behavior and reduce information asymmetry-two channels of capital allocation efficiency. Overall, community social capital works as a compensatory monitoring and information transfer mechanism and improves the firms’ capital allocation efficiency.     

Risk-based capital for credit insurers with business cycles and dynamic leverage

This paper develops a risk-based capital pricing model for credit insurance portfolios held by a vulnerable insurer. The model accounts for business cycles using a two-state Markov switching model, and allows for dynamic leverage adjustment by the insured firms. The new proposed model, which incorporates risk-based capital practice, is better for both the insurer and the insured firms. Based on the risk-adjusted performance metric, we found that the insurer is better off insuring short- and medium-term loans in expansion and steady states, while it is better off backing both short- and long-term loans in recessions. Our results also emphasize that macroeconomic uncertainty significantly impairs the creditworthiness of the insurer and insured firms.     

政策性农业保险经营技术障碍与巨灾风险分散机制研究

本文从我国政策性农业保险的发展现状和特征出发,分析了政策性农业保险的主要试点模式,认为目前各地的农业保险试点重财税等政策索要,轻经营技术研究,困扰我国农业保险发展的长期障碍因素并未根除。在深入分析农业巨灾风险难以分散的特性以及对农业保险经营影响的基础上,本文提出了构建我国多层次农业巨灾风险保障体系的建议,包括直接保险公...     

An intervention analysis for the relationship between capital expenditure decisions and the market value of firms

This article is meant to explore the relationship between corporate capital expenditure decisions and the market value of firms using the intervention technique. The article shows that deep cuts in capital expenditures may, for sink-hole type projects, provide a positive signal to the marketplace. For non-sink-hole type projects, our findings are not quite consistent with those reported in McConnell and Muscarella (1985).     

发挥资本导向整合银行风险管理体制

近年来,资本管理在商业银行中的地位越来越重要,这是监管部门强调资本约束原则的效果,也是商业银行自身控制风险的重要手段。文章指出,作为商业银行风险管理工作的重要抓手,资本管理的核心是计量能力的提升,对于资本分配应掌握总量控制的原则。中国银行业应以资本管理为导向,逐步完善自身的风险管理体系。