Value Creation in the Insurance Industry

Using the insights of current research in corporate finance and financial institutions, the authors briefly present a consistent economic framework for looking at insurance. Shareholders of insurance companies provide risk capital that is invested in financial assets and therefore earns the market return of the assets it is invested in. However, due to the legal and fiscal environment insurance companies are in, they have a competitive disadvantage at investing, and this gives rise to frictional capital costs. The core competence of insurers is in managing the size of these frictional capital costs. Insurers must ensure that they can sell insurance for a price in excess of what they need to produce the cover they sell and compensate the incurred frictional costs on risk capital. It is through the ability to do so that insurers create shareholder value.     

INTRADAY MARKET BEHAVIOR AND THE EXTENT OF FEEDBACK BETWEEN S&P 500 FUTURES PRICES AND THE S&P 500 INDEX

In this study we empirically examine the intraday lead/lag relation between S&P 500 futures prices and the S&P 500 index, and whether daily market characteristics are associated with changes in the relation. We estimate daily Geweke measures of feedback and regress time series of these measures on daily price volatility and volume characteristics. Results indicate that the contemporaneous price relation is substantive and that measures of contemporaneous feedback are positively associated with the daily range of the futures price. The primary implication is that the relation between cash and futures prices becomes stronger as futures price volatility increases. As volatility increases, information is being impounded at a faster rate so that futures and equity markets operate more closely as one market. Large futures price moves, by themselves, are not responsible for breakdowns in the stock-futures price relation.     

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Shall the New EU Members Introduce the Euro? Some Macroeconomic Policy Effects

After the EU enlargement in 2004, there is a clear commitment of the EU and the new member states to aim at an enlargement of the euro zone within the European Economic and Monetary Union (EMU) as well. This might have significant effects on the old EMU, the new members, and even on the global economy. The present paper analyzes some macroeconomic effects and particularly the impact on the effects of stabilization policies when switching to an enlarged euro zone under different assumptions about fiscal and monetary policy regimes in Europe and under alternative types of economic shocks. Also, the implications for the US of different European monetary regimes are evaluated. The results suggest that economic benefits for all countries are rather small. For the Central and Eastern European countries (CEECs), even disadvantages may dominate.     

Correlates of Narrow Bracketing

Behavior often deviates from standard predictions because individuals evaluate the consequences of choices separately (i.e., narrow bracketing) rather than jointly. The main existing theories classify different narrow bracketing phenomena as either (i) choice errors caused by cognitive limitations, or (ii) strategies to achieve self‐control. Using an online experiment, we find consistent evidence for theory (ii): mental budgets and narrow goals are related to each other and to measures of self‐control, but are distinct from other forms of narrow bracketing. Evidence for the complementary theory (i) is less consistent: few choice bracketing phenomena are related to each other and to cognitive skills.     

The South African Financial Cycle and its Relation to Household Deleveraging

This paper considers the extent to which South African households have deleveraged, since the global financial crisis of 2007/2008. We extend the official South African Reserve Bank business cycle methodology to date financial cycles, from which we identify the peaks and troughs of the South African financial cycle going back to 1966. Our composite financial cycle index peaks in April 1974, January 1984 and May 2007; it has bottomed out in July 1979 and February 1999. Thus, we still await the trough. We further compare and contrast the deleveraging process in the current downward phase to the experiences from previous financial cycles. We find that the average period of the financial cycle in South Africa is much longer (approximately 17.3 years) than that of the business cycle (approximately 5.8 years), and that deleveraging has not yet matched the degree of deleveraging seen in previous downward phases. Our results suggest that further deleveraging is necessary, before we can expect to turn the financial corner.