Iterated VaR or CTE measures: A false good idea?

The purpose of this paper is twofold. Firstly, we consider different risk measures in order to determine the solvency capital requirement of a pension fund. Secondly, we illustrate the impact of the time horizon of long-term guarantee products on these capital. We consider a financial market modelled by a common Black–Scholes–Merton model. We neglect the mortality and underwriting risks by assuming that the pension fund is fully hedged against these risks, which allows us to keep understandable and tractable formulæ (the longevity risk will be a part of future researches). A portfolio is built in this market according to different strategies and the pension fund offers a fixed guaranteed rate on a certain time horizon. We begin with well-known static risk measures (value at risk and conditional tail expectation measures) and then we consider their natural dynamic generalization. In order to be time consistent, we consider their iterated versions by a backward iterations scheme. Within the dynamic setting, we show that solvency capital can be expensive and that attention must be paid to the safety level considered.     

International portfolio diversification: Currency,industry and country effects revisited

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not show significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.     

Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle

We extend the Rothschild-Stiglitz (RS) insurance market model with adverse selection by allowing insurers to offer either non-participating or participating policies, that is, insurance contracts with policy dividends or supplementary calls for premium. It is shown that an equilibrium always exists in such a setting. Participating policies act as an implicit threat that dissuades deviant insurers who aim to attract low-risk individuals only. The model predicts that the mutual corporate form should be prevalent in insurance markets where second-best Pareto efficiency requires cross-subsidisation between risk types.     

Solvable local and stochastic volatility models: supersymmetric methods in option pricing

In this paper we provide an extensive classification of one- and two-dimensional diffusion processes which admit an exact solution to the Kolmogorov (and hence Black–Scholes) equation (in terms of hypergeometric functions). By identifying the one-dimensional solvable processes with the class of integrable superpotentials introduced recently in supersymmetric quantum mechanics, we obtain new analytical solutions. In particular, by applying supersymmetric transformations on a known solvable diffusion process (such as the Natanzon process for which the solution is given by a hypergeometric function), we obtain a hierarchy of new solutions. These solutions are given by a sum of hypergeometric functions, generalizing the results obtained in a paper by Albanese et al. (Albanese, C., Campolieti, G., Carr, P. and Lipton, A., Black–Scholes goes hypergeometric. Risk Mag., 2001, 14, 99–103). For two-dimensional processes, more precisely stochastic volatility models, the classification is achieved for a specific class called gauge-free models including the Heston model, the 3?/?2-model and the geometric Brownian model. We then present a new exact stochastic volatility model belonging to this class.     

Quality control mechanisms under capitation payment for medical services

As a result of rising health care costs, many countries, including the United States, have turned to managed care organizations and the use of capitation payment systems. Although this type of system is an effective mechanism for reducing excessive utilization of health care, it may lead to the underprovision of medical services. In this paper propensity to underprovide medical services in a prepayment system as well as the effects of auditing/monitoring on physician behaviour and patient well-being are examined. Conditions are found under which managed care yields more efficient outcomes than traditional fee-for-service care.
Suite à la croissance importante des coûts des soins, plusieurs pays, y compris les Etats Unis, ont commencéà se tourner vers des organisations spécialisées pour gérer la prestation des services et à faire usage de systèmes de rémunération per capita. Même si ce genre de système est un mécanisme efficace pour réduire l'usage excessif des service de santé, il peut entraîner une offre déficiente de services médicaux. Ce mémoire examine la propensitéà fournir moins de services dans un système de pré-paiement. On examine aussi les effets de la surveillance et de la vérification sur le comportement des médecins et sur le bien-être des patients. On met en lumière les conditions qui assurent que les soins fournis dans un tel système donneront de meilleurs résultats que la rémunération à l'acte.     

The role of fiscal policy in the St. Louis model: An evaluation and some new evidence

This paper re-examines the role of high employment budget expenditures (fiscal policy) in the St. Louis expenditure equation by using spectral analysis and the spectral estimates of a two-sided distributed lag model. The analysis is undertaken with quarterly U.S. data from 1947:1 to 1984:IV in the rate of change form. A salient conclusion is that fiscal policy has statistically significant partial coherences with (nominal) income, with the latter leading the former over the business cycle. We find that income is jointly related to lead terms of fiscal policy in a two-sided distributed lag model. Some explanations for these results are provided.     

The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

We analyze the role of knowhow acquisition in the formationand duration of joint ventures. Two parties become partnersin a joint venture to benefit from each other’s knowhow.Joint operations provide each party with the opportunity toacquire part of its partner’s knowhow. A party’sincreased knowhow provides the impetus for the dissolution ofthe joint venture. We characterize the conditions under whichdissolution takes place, identify the party that buys out itspartner, determine the time to dissolution, establish its comparativestatics, and examine the implications of knowledge acquisitionfor the desirability of joint venture formation. (JEL code:G34)     

Price competition during and after promotions

We provide a framework for setting regular prices and using promotional discounts in a duopoly where long‐term promotional effects are present and the firms' pricing and promotional strategies are common knowledge (e.g., as in online markets). We show that at equilibrium, the two firms may not promote and instead adopt an Everyday Low Price (EDLP) strategy. Consumers' tendency to stockpile promoted products, the level of brand loyalty and product differentiation, and the possibility of a postpromotional sales increase critically influence regular prices, price discount rates, and profits. Under some conditions consumer stockpiling intensifies promotional competition and reduces firms' profits while the possibility of attracting new consumers reduces the need to heavily promote and ensures better profits. Managerial implications are discussed. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.