Optimal risk sharing with non-monotone monetary functionals

We consider the problem of sharing pooled risks among n economic agents endowed with non-necessarily monotone monetary functionals. In this framework, results of characterization and existence of optimal solutions are easily obtained as extensions from the convex risk measures setting. Moreover, the introduction of the best monotone approximation of non-monotone functionals allows us to compare the original problem with the one which involves only ad hoc monotone criteria. The explicit calculation of optimal risk sharing rules is provided for particular cases, when agents are endowed with well-known preference relations.      

A comment on the role of prices for excludable public goods

Blomquist and Christensen [(2005). The role of prices for excludable public goods, International Tax and Public Finance, 12 ,61–79] argue that welfare is initially decreasing in the price of an excludable public good and that the case for a positive price for an excludable public good price is weak. We argue that this result follows from their particular characterization of the public good and that an alternative and equally reasonable characterization overturns their result. Hence, the policy case for a positive price on the public good is stronger than Blomquist and Christiansen suggest. JEL Classification H21 · H41     

On the short-time behavior of the implied volatility for jump-diffusion models with stochastic volatility

In this paper we use Malliavin calculus techniques to obtain an expression for the short-time behavior of the at-the-money implied volatility skew for a generalization of the Bates model, where the volatility does not need to be a diffusion or a Markov process, as the examples in Sect. 7 show. This expression depends on the derivative of the volatility in the sense of Malliavin calculus. E. Alòs’ research is supported by grants MEC FEDER MTM 2006 06427 and SEJ2006-13537. J.A. León’s research is partially supported by the CONACyT grant 45684-F. J. Vives’ research is supported by grant MEC FEDER MTM 2006 06427.     

Sequential American Exchange Property Options

Property development activities often occur in stages, which are appropriately modeled as sequential American exchange property options, where there are interim expenditures required in order to keep the property development options “alive”. Normally American exchange options require a numerical solution, but herein there is a new closed-form approximate solution, which is computationally efficient and accurate. This method combines repeats of Margrabe European exchange and Geske compound option solutions with tight upper boundaries of either American perpetuities or European exchange options with a high volatility. Illustrations are provided of the sensitivity of the real sequential options and optimal timing to changes in several parameters, which provide a framework for property policy (tax, subsidy and regulatory) guidelines and for property development strategy evaluation. There are several plausible applications of these real option models in commercial and residential property development, within commercial property leases, with regard to switching tenants, and agricultural alternatives.     

Corporate and personal income tax declarations

Decisions by firms and individuals on the extent of their tax payments have generally been treated as separate choices. Empirically, a positive relationship between corporate and personal income tax evasion can be observed. The theoretical analysis in this paper shows that a manager's decision on the firm's behaviour will be independent of his personal preferences if the gain from reducing corporate tax payments is certain, as in the case of tax avoidance. If, however, the firm evades taxes so that the manager's income depends on whether the firm's activities are detected or not, corporate and personal income tax evasion choices cannot be separated. Jel Code H 24 · H 25 · H 26     

Tax liens: a novel application of asset pricing theory

Although relatively obscure, the market for distressed real estate tax liens exists in over 30 U.S. states, with a market size estimated to be around 20 billion dollars. While this niche asset class is relatively unknown to academics, internet advertising hypes tax liens to the populace as providing extraordinary returns. Not yet scientifically studied, this market provides a fertile and untouched arena for the application of asset pricing theory. Using insights from several areas of asset pricing, we formulate and test a pricing model for tax liens. The empirical evidence supports the pricing model, the (increasing) competitiveness of the tax lien market, and an unfair tax auction bidding mechanism for property owners that may provide extraordinary returns to investors, lending some credibility to the industry claims. We suggest avenues for extensions and further research.     

Information reduction via level crossings in a credit risk model

This paper provides an alternative credit risk model based on information reduction where the market only observes the firm’s asset value when it crosses certain levels, interpreted as changes significant enough for the firm’s management to make a public announcement. For a class of diffusion processes we are able to provide explicit expressions for the firm’s default intensity process and its zero-coupon bond prices.      

Reflections on the general theory of second best at its golden jubilee

The origin of the second best article is described and criticisms assessed. Distortions making impossible the achievement of either first or second best optima are outlined. Attempts to establish the applicability of first best rules are criticised, as are general rules for making piecemeal efficiency improvements. Both often use models containing empirically invalid assumptions and a selected few of the full set of distortions. Practical policy advice requires more parochial objective functions than community welfare; must rely on formal and appreciative theory, empirical evidence, and large doses of judgment; and should concentrate on making piecemeal improvements in context-specific situations.     

Homeownership as a Constraint on Asset Allocation

Personal preferences and financial incentives make homeownership desirable for most families. Once a family purchases a home they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate an individual’s optimal asset allocation decisions when they are subject to a “homeownership constraint.” Next, we perform a “thought experiment” where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual’s asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that the homeowner would require a substantial increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision. The robustness of the analysis is evaluated with respect to the model’s parameters and initial state variables. We find that changes in the values of the constraint (i.e., the value of the home) and the expected real rate of home value appreciation are the only state variables or parameter that is associated with a large change in asset allocation and/or the burden imposed by the housing constraint. This finding suggests the importance of a detailed examination of the impact of inter-regional differences in home prices and expected rates of appreciation on asset allocation and post-retirement wealth.     

Wird der vom Regierungsentwurf eines VVG geplante Direktanspruch des Geschädigten gegen den Pflichthaftpflichtversicherer ein stumpfes Schwert? Zur Notwendigkeit eines Informationsanspruchs des Geschädigten in der neuen Pflichthaftpflichtversicherung

The amendment of the German Act on Insurance Contracts comprises a number of substantial modifications regarding liability insurance. The most important modification is the introduction of a direct claim against the insurer with regard to all compulsory insurances. Such a direct claim is up to now only known from the motor vehicle liability insurance. Yet, a direct claim will be advantageous for the aggrieved claimant only if he manages to identify the proper insurer. As a result of the structural differences to the motor vehicle liability insurance the act of identifying the insurer is almost utterly impossible for the claimant without any help by the insured. Thus the claimant must also be given a claim against the insured to be furnished with all necessary information regarding the insurer. This right originates from sec. 242 of the German Civil Code.