Multi-population mortality models: fitting,forecasting and comparisons

We review a number of multi-population mortality models: variations of the Li & Lee model, and the common-age-effect (CAE) model of Kleinow. Model parameters are estimated using maximum likelihood. Although this introduces some challenging identifiability problems and complicates the estimation process it allows a fair comparison of the different models. We propose to solve these identifiability problems by applying two-dimensional constraints over the parameters. Using data from six countries, we compare and rank, both visually and numerically, the models’ fitting qualities and develop forecasting models that produce non-diverging, joint mortality rate scenarios. It is found that the CAE model fits best. But we also find that the Li and Lee model potentially suffers from robustness problems when calibrated using maximum likelihood.     

Parameter risk in time-series mortality forecasts

The projection of mortality rates is an essential part of valuing liabilities in life insurance portfolios and pension schemes. An important tool for risk management and solvency purposes is a stochastic projection model. We show that ARIMA models can be better representations of mortality time-series than simple random-walk models. We also consider the issue of parameter risk in time-series models from the point of view of an insurer using them for regulatory risk reporting – formulae are given for decomposing overall risk into undiversifiable trend risk (parameter uncertainty) and diversifiable volatility. Particular attention is given to the contrasts in how academic researchers might view these models and how insurance regulators and practitioners in life offices might use them. Using a bootstrap method we find that, while certain kinds of parameter risk are negligible, others are too material to ignore. We also find that an objective model selection criterion, such as goodness of fit to past data, can result in the selection of a model with unstable parameter values. While this aspect of the model is superficially undesirable, it also leads to slightly higher capital requirements and thus makes the model of keen interest to regulators. Our conclusions have relevance to insurers using value-at-risk capital assessments in the European Union under Solvency II, but also territories using conditional tail expectations such as Australia, Canada and Switzerland.     

ON THE VALUE OF A LARGE CUSTOMER BASE IN MARKETS WITH SWITCHING COSTS*

It is usually acknowledged that firms benefit from a large customer base in markets with switching costs. However, Klemperer [1995] argues that this may not be true if an increase in the size of a firm's customer base induces fierce price competition, making the firm worse off. This paper shows that such an outcome can be obtained under standard assumptions, such as homogeneous goods and uniformly distributed switching costs. In the model, firms have very limited incentives to fight for market shares, and the notion that switching costs make markets less competitive is stronger than previously shown.     

Das leere Versprechen der aktiven Konjunktursteuerung

Since the financial crisis and the ensuing sluggish recovery, a growing number of voices have called for a more active role for fiscal policy to stimulate the economy. We reject this call and argue that in normal times, monetary policy and automatic stabilisers are sufficient to smooth the business cycle. The effectiveness of active fiscal policy is too uncertain and the requirements for a sensible adjustment are too high. Moreover, determining the state of the business cycle is almost impossible in real time. The benefits of active fiscal policy therefore do not outweigh its costs. Only in exceptional situations should policy makers consider active fiscal policy measures as an option.     

Argumente gegen die Reform des Stabilitätsgesetzes wenig überzeugend — eine Replik

In their reply, Dullien and van Treeck criticise the argument of Michaelis, Elstner and Schmidt that the German Stability and Growth law (StabG) from the 1960s must not be reformed. They claim that Michaelis et al. neglect that the concept of sustainability has changed over the past 50 years and that nowadays issues such as social and ecological sustainability should be included. Moreover, the claim by Michaelis et al. that the StabG provides important tools for business cycle management is hardly convincing, given that these tools have not been used since the 1970s and stimulus packages have been passed on other legal grounds. / In their response Michaelis et al. stress that economic policy has to consider equally aspects of economic, social and ecological sustainability. The StabG, however, is a completely inappropriate basis for attempts to address aspects of social and ecological sustainability. The main use of the StabG consists in the possibility to quickly implement fiscal measures that could mitigate the consequences of severe economic downturns. Proposals of Dullien and van Treeck that various dimensions of sustainability are controllable by a predetermined set of instruments neglect the complexity of the social market economy.     

Deutschlands Energieversorgungsrisiko gestern,heute und morgen

Along with the oil price, concerns about the security of energy supply have soared once again in recent years. In this paper, we analyze Germany’s past und future energy security situation and compare it to that of other G7 countries using a statistical indicator of the long-term energy supply risk and empirical energy data for the years 1978 through 2007. We find that Germany’s energy supply risk has increased substantially since the oil price crises of the 1970s, whereas France and Japan have managed to reduce their risks dramatically, most notably through the deployment of nuclear power plants. Among G7 countries, Germany’s risk is only surpassed by that of Italy, while it can be expected that the German energy security situation may deteriorate in the future, not least due to the phase-out of nuclear power.     

Perceived trade-off between education and sports career: evidence from professional football

To explore the attitudes towards risky career choices of young people in highly competitive environments, we surveyed almost 1000 football players in the youth academies of German professional clubs (Bundesliga), who must generally decide early in their careers whether or not to risk quitting school to focus solely on a professional football career. Based on the survey responses, we empirically analysed which factors influence these youths’ tendencies to choose a high-risk career option over a lower risk one. Our results seem to indicate that such risk taking in competitive environments can be explained by potential benefits expected from this decision, as well as judgments about the likelihood of achieving the desired career. Risk attitudes towards career choices vary by differences in individuals’ estimates of the potential benefits and in particular, in their own assessments of the likelihood of success, which is an important driver of risk acceptance. We also found that opportunity cost considerations influence risk acceptance: the better the low-risk option, the less willing the individual to give it up for a high-risk alternative. In addition, both national origin and level of cultural integration play a role in attitudes towards risky career choices, with reductions in the latter increasing the risk premium of quitting school.     

Is Private Saving in Latin America and the Caribbean Different?

Private saving and economic growth are intimately linked, and low saving rates in Latin America and the Caribbean (LAC) have often been held responsible for disappointing growth in the region. Thus, identifying factors that spur saving is critical. This paper surveys previous empirical studies on LAC, highlighting contradictions, omissions and in some cases inconclusiveness of findings. Relying on a large dataset and a nested econometric framework, it analyzes private saving patterns and explores the role of its determinants in LAC, across LAC sub‐regions and compared with other regions. While the results highlight great heterogeneity in private saving rates within LAC and compared with the rest of the world, saving determinants are broadly the same notwithstanding some differences in sensitivity and contributions' sizes, and include its lag, income, demographics and public saving.     

Testing measurement invariance using multigroup CFA: differences between educational groups in human values measurement

This article applies the testing procedures for measurement invariance using multigroup confirmatory factor analysis (MGCFA). It illustrates these procedures by investigating the factorial structure and invariance of the Portraits Value Questionnaire (PVQ, Schwartz et al.: J. Cross Cult. Psychol. 32(5), 519–542 (2001)) across three education groups in a population sample (N  =  1,677). The PVQ measures 10 basic values that Schwartz postulates to comprehensively describe the human values recognized in all societies (achievement, hedonism, self-direction, benevolence, conformity, security, stimulation, power, tradition and universalism). We also estimate and compare the latent means of the three education groups. The analyses show partial invariance for most of the 10 values and parameters. As expected, the latent means show that less educated respondents attribute more importance to security, tradition, and conformity values.