Financial and Demographic Risks of a Portfolio of Life Insurance Policies with Stochastic Interest Rates

Abstract

We refer to a recent paper by G. Parker (1997) in which the risk of a portfolio of life insurance policies (namely the risk related to the entire contractual life) is studied by separating the demographic component from the financial component. In our paper, after making a brief summary of Parker’s model, we propose two additional contributions: 1. We first give the problem a different formalization, thus allowing a portfolio risk analysis by management periods and a study of the risk due to the interactions among years;

2. We elaborate on a powerful and flexible algorithm for calculating the probability distribution of the sum of random variables that proves useful to solve not only the problems discussed in this paper concerning the risk analysis but also various other problems.

In the paper, we also show, for both contributions, some applications made under the same financial and demographic assumptions taken by Parker; we also compare our results with Parker’s results.     

On the bi-dimensionality of liquidity

Variations in overall liquidity can be measured by simultaneous changes in both immediacy costs and depth. Liquidity changes, however, are ambiguous whenever both liquidity dimensions do not reinforce each other. In this paper, ambiguity is characterized using an instantaneous time-varying elasticity concept. Several bi-dimensional liquidity measures that cope with the ambiguity problem are constructed. First, it is shown that bi-dimensional measures are superior since commonalities in overall liquidity cannot be fully explained by the common factors in one-dimensional proxies of liquidity. Second, it is shown that an infinitesimal variation in either market volatility or trading activity augments the probability of observing an unambiguous liquidity adjustment. Ambiguity strongly depends on the expected (deterministic) component of volatility.     

Rating versus ranking: What is the best way to reduce response and language bias in cross-national research?

We propose solutions to two recurring problems in cross-national research: response style differences and language bias. In order to do so, we conduct a methodological comparison of two different response formats—rating and ranking. For rating, we assess the effect of changing the commonly used 5-point Likert scales to 7-point Likert scales. For ranking, we evaluate the validity of presenting respondents with short scenarios for which they need to rank their top 3 solutions. Our results – based on two studies of 1965 undergraduate and 1714 MBA students in 16 different countries – confirm our hypotheses that both solutions reduce response and language bias, but show that ranking generally is a superior solution. These findings allow researchers to have greater confidence in the validity of cross-national differences if these response formats are used, instead of the more traditional 5-point Likert scales. In addition, our findings have several practical implications for multinational corporations, relating to issues such as selection interviews, performance appraisals, and cross-cultural training.     

Monetary policy in the UK

The authors argue that the institutional dimension of the Bankof England monetary policy and the role the UK HM Treasury assumesin this framework are both firmly based on the New Consensusin Macroeconomics (NCM). This is also the theoretical frameworkupon which the inflation targeting element of monetary policyis firmly based. This paper discusses these aspects of UK monetarypolicy, and then assesses the policy that has been pursued since1997 (with some reference made to the period between 1992 and1997 when a version of the framework was introduced). The strategyhas been successful in terms of keeping UK inflation rates withinthe targets set by HM Treasury. However, a number of problematicissues are highlighted and discussed.     

The cycles approach

The cycles approach uses linear algebra, graph theory, and probability theory to study common prior existence and analyze models of knowledge, which are characterized by a state space, a set of players, and their partitions. In finite state spaces, there is a simple formula for the cyclomatic number, i.e., the dimension of cycle spaces of a model. We prove that the cyclomatic number is the minimum number of cycle equations that must be checked to guarantee the existence of a common prior, and explain why some cycle equations are automatically satisfied. There is an isomorphism taking cycles into cycle equations; adding cycles is the counterpart of multiplying the corresponding cycle equations. If the cyclomatic number is zero, a common prior always exists, regardless of the probabilistic information given by players’ posteriors.     

Long-term care,dependence and the third sector

The demographic changes that have taken place throughout the twentieth and early twenty-first century confirm the increase in the number of older adults. More older adults implicitly entail an increase in the number of people in a situation of dependence. The issue of long-term care has economic, social and health care implications. This article addresses the characteristics of the companies involved in long-term care services and the employment generated. The database of the Spanish Directory of Companies (DIRCE) provided information on the variables used in the analysis: companies created, employment generated, companies by legal status and territorial distribution of the companies. Noteworthy findings were that the long-term care service sector contributes more to creating jobs than other economic sectors and that third sector companies are important in providing long-term care services.     

Structural change and foreign direct investment: globalization and regional economic integration

This paper investigates flows of inward and outward foreign direct investment (FDI) and FDI-to-GDP ratios in a sample of 62 countries over a 30 year time span. Using several endogenous structural break procedures (allowing for one and two break points), we find that: (1) the great majority of the series have structural breaks in the last 15 years, (2) post-break FDI and FDI/GDP ratios are substantially higher than the pre-break values, and (3) most breaks seem to be related to globalization, regional economic integration, economic growth, or political instability. Static and dynamic panel-data analyses accounting for and/or addressing endogeneity, simultaneity, nonstationarity, heterogeneity and cross-sectional dependence show that FDI is negatively related to exchange rate volatility and GDP per capita, but positively related to some regional integration agreements, trade openness, GDP, and GDP growth. Most notably, the European Union is the only regional economic integration unit found to consistently have significant and positive effects on FDI.     

Gender divisions of domestic labour and paid domestic services

ABSTRACT

This article investigates the relationship between the sharing of domestic tasks in dual-earner mixed-sex couples and the use of paid domestic services. Using results from a small-scale survey of the domestic outsourcing practices of employees of a large service-sector organisation in the UK, we find that in households: full-time working by women and presence of younger children is positively associated with the use of paid domestic services; there is no association between the gender division of traditionally female domestic tasks carried out within the couple and use of paid services; but in contrast, greater male involvement in traditionally male and traditionally gender-neutral tasks is positively associating with using paid domestic services. These findings tentatively suggest that a new arrangement may be emerging in which some couples address a heavy workload and a desire for a less traditional division of domestic labour by men participating more in close-ended domestic tasks and outsourcing the more time-consuming tasks traditionally undertaken by women to paid-service providers.