Pricing Participating Inflation Retirement Funds Through Option Modeling and Copulas

Abstract

Pension plans and life insurances offering minimum performance guarantees are very common worldwide. In the Brazilian market, the customers of a common type of defined contribution plan have the right to receive, over their savings, the positive difference between the return of a specified investment fund, usually a fixed income fund, and the minimum guaranteed rate, commonly defined as the composition of a fixed interest rate and a floating inflation rate. This instrument can be characterized as an option to exchange one asset, the minimum guaranteed rate, for another, the return of the specified investment fund. In this paper we provide a closed formula to evaluate this liability that depends on two stochastic rates assuming bivariate normality. We also explore the use of copulas for the modeling of the dependence structure and price the options using Monte Carlo simulation to compare the effects of the copula specification in their values. An application with real data is provided. The model makes use of a one-factor Vasicek framework for the term structures of interest rate and inflation rate.     

A No‐Arbitrage Fractional Cointegration Model for Futures and Spot Daily Ranges

The no‐arbitrage relation between futures and spot prices implies an analogous relation between futures and spot daily ranges. The long‐memory features of the range‐based volatility estimators are analyzed, and fractional cointegration is tested in a semi‐parametric framework. In particular, the no‐arbitrage condition is used to derive a long‐run relationship between volatility measures and to justify the use of a fractional vector error correction model (FVECM) to study their dynamic relationship. The out‐of‐sample forecasting superiority of FVECM, with respect to alternative models, is documented. The results highlight the importance of incorporating the long‐run equilibrium in volatilities to obtain better forecasts, given the information content in the volatility of futures prices. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 33:77–102, 2013     

Estimating time-varying variances and covariances via nearest neighbour multivariate predictions: applications to the NYSE and the Madrid Stock Exchange Index

In this article, we present a technique to obtain the time-varying covariance matrix for several time series for nearest neighbour predictors. To illustrate the use of this technique, we analyse the time-varying variances and correlations between the daily returns on two equity stock market indexes, the New York Stock Exchange and the Madrid Stock Exchange Index.     

Trade and the Effect of Public Investment on Regional Inequalities in Heterogeneously Integrated Areas

Regional integration, it is argued, challenges the distribution of economic activity among regions. However, the government role in shifting the patterns of regional inequalities is still under debate and has received small comprehensive empirical evidence. This paper examines the hypothesis of trade as channelling public investment and, thus, perpetuating regional inequalities. We argue that the interplay of public and private investment plays a key role in stimulating trade and economic activity. To avoid problems of cross‐country heterogeneity and comparability this study examines data for two countries; Mexico and Spain, both followers of trade integration arrangements. Findings indicate that regional inequalities in Mexico are significantly explained by differences in export capacity serving to boost private investment whereas inequalities in Spain are appreciably driven by previous endowments and private capital formation.     

Les Caisses Rurales Face à l'Union Monétaire: Une étude d'efficacité comparée

The authors analyze the economic efficiency of rural credit unions of large size compared to a group of credit unions. The methodology is based on the analysis of profitability, productivity and efficiency ratios and on the estimation of a Cobb–Douglas cost function. The evolution during the period 1989–1994 as well as the situation at the end of this period are examined. The same methodology is used to study the rural credit unions individually.     

European Periphery Crises,International Financial Markets,and Democracy

This article analyzes the origin and causes of the recent economic and financial crises, mainly for the countries located in the periphery of the European Union (EU), as well as their evolution and transformation into social, political, and institutional crises. After explaining the differential impact of the crises on EU economies, we analyze how the economic policies developed thus far not only are unable to resolve the current crisis pattern but also actually entail a risk to the present democratic models by transferring the legitimate control over governments from citizens and democratic parliaments to unelected, nonrepresentative international financial markets.     

Sequential Betting Behavior: A Test of Asymmetric Inconsistencies in Group Decision Making

Previous research has shown that individual decision makers tend to bet more than initially planned after experiencing a loss but not after a gain. This research tests whether groups in consensus decision‐making contexts also demonstrate similar asymmetric inconsistencies. Two experiments, one at the individual level and one with three‐person groups, were carried out based on a gambling‐type betting task. Although individuals planned more conservatively than groups regarding their betting behavior after the first outcome, both individuals and groups misestimated their own betting behavior after losses but not after gains. Negative, but not positive, emotional reactions to previous decision outcomes were also misestimated, leading to incorrect predictions of future behavior. Implications for theory and future research are discussed.     

LATIN AMERICAN EXCHANGE RATE DEPENDENCIES: A REGULAR VINE COPULA APPROACH

This study implements a regular vine copula methodology to evaluate the level of contagion among the exchange rates of six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) from June 2005 to April 2012. We measure contagion in terms of tail dependence coefficients, following Fratzscher's (1999) definition of contagion as interdependence. Our results indicate that these countries are divided into two blocks. The first block consists of Brazil, Colombia, Chile, and Mexico, whose exchange rates exhibit the largest dependence coefficients, and the second block consists of Argentina and Peru, whose exchange rate dependence coefficients with other Latin American countries are low. We also found that most of the Latin American exchange rate pairs exhibit asymmetric behaviors characterized by nonsignificant upper tail dependence and significant lower tail dependence. These results imply that there exists contagion in Latin American exchange rates in periods of large appreciations, whereas there is no evidence of contagion during periods of currency depreciation. This empirical regularity may reflect the “fear of appreciation” in emerging economies identified by Levy‐Yeyati, Sturzenegger, and Gluzmann (2013). (JEL C32, C51, E42)     

Digital transformation in maritime ports: analysis and a game theoretic framework

Digitalization is pushing the maritime industry beyond its traditional limits and provides many new opportunities to enhance the productivity, efficiency, and sustainability of logistics. The concept of smart ports, for instance, aims to adopt modern information technologies to enable a better planning and management within and between ports. Strong facilitators of the digitalization are investments into technology and cooperations for promoting information sharing and a better coordination and collaboration, often regarded as a stumbling block in highly competitive environments. Besides many new opportunities, important economic issues and problems arise. We provide an overview of the development and state-of-the-art of digital transformation in modern seaports in order to identify current potentials and barriers. Focusing on the crucial and challenging aspects of coordination and collaboration, we present a conceptual game theoretic framework that allows benefits and cost allocations considering inter-, intra-, and meta-organizational perspectives. We further demonstrate how this framework can be used to develop tools and methods for supporting strategic decision making for driving the digital transformation in seaports and addressing new economic issues and problems.