Capital asset pricing models with default risk: Theory and application in insurance

The Capital Asset Pricing Model has been used frequently to derive a fair price of insurance. But the use of this model overestimates insurance premiums because it does not account for the insolvency risk of insurers. This paper examines how the insurance price should be fairly adjusted when insurers' default risk is considered. It develops a model which shows that fair insurance premiums are lower when insurance firms have a positive probability of being insolvent. Using data of property liability insurers during the period from 1943–99, the paper further estimates the effects of the insolvency risk on insurers' underwriting profit rate. It shows that the incorporation of the default risk of insurers in the model, by significantly reducing the required price for insurance, would lead to lower profit potentials. Some writers argue that including the insolvency risk when calculating insurance premiums is not so necessary because of the existence of states' guaranty insurance funds which protect consumers. However, as shown in the paper, these funds have provided inadequate protection to consumers. Therefore, because of the increase in the number of insolvencies in recent years, and because of the limited coverage provided by states' guaranty funds, it seems that considering the insolvency risk in insurance pricing has become very necessary.     

Discussion of “Divisional performance measurement and transfer pricing for intangible assets”

The conference paper by Johnson (2006, Review of Accounting Studies, forthcoming) develops an incomplete-contracting transfer pricing model with a number of novel features: taxation, sequential investments, and intangible assets being transferred. This discussion aims to disentangle these features so as to highlight those that are the key drivers of the results. Moreover, I show that some of the results can be generalized to settings involving a greater level of technological interdependency between the divisions.     

Exchange rate flexibility and the common agricultural policy of the european economic community

Zusammenfassung Wechselkursflexibilit?t und die Gemeinsame Agrarpolitik der Europ?ischen Wirtschaftsgemeinschaft. — Da die Preise landwirtschaftlicher Erzeugnisse im Gemeinsamen Markt in ?Verrechnungseinheiten? (die wertm?\ig dem amerikanischen Dollar entsprechen) festgesetzt werden, spiegeln sich Wechselkurs?nderungen direkt im Gegenwert der nationalen W?hrungen wider. Daher k?nnen sehr bedeutende ?konomische Auswirkungen der Wechselkursver?nderungen innerhalb der Europ?ischen Wirtschaftsgemeinschaft (EWG) auf Verbraucher und Erzeuger landwirtschaftlicher Produkte festgestellt werden. Der vorliegende Aufsatz besch?ftigt sich nicht mit den politischen Konsequenzen, sondern konzentriert sich auf die wirtschaftlichen Folgen der Wechselkurs?nderungen. Im Abschnitt I werden einige der wichtigsten Grundzüge der gegenw?rtigen Gemeinsamen Agrarpolitik dargestellt und einige der verschiedenen vorgeschlagenen Ma\nahmen zur Erh?hung der Wechselkursflexibilit?t diskutiert. Im zweiten Kapitel wird der angebliche Konflikt zwischen dem Konzept des gemeinsamen Agrarpreisniveaus für die Gemeinschaft und der Notwendigkeit von Anpassungen der Wechselkursparit?ten untersucht. Au\erdem werden einige m?gliche Modifikationen der Gemeinsamen Agrarpolitik vorgeschlagen. Der dritte Abschnitt analysiert die Auswirkungen von Ver?nderungen der DM-Parit?t gegenüber anderen europ?ischen W?hrungen auf die deutschen Landwirte. Ein abschlie\endes Kapitel fa\t die Ergebnisse des Berichts zusammen, w?hrend einige wichtige Zahlenreihen in einem Anhang zusammengestellt sind.

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Resumen Flexibilidad cambiaria y la política agraria común de la Comunidad Económica Europea. — Debido a que los precios de los productos agrícolas del Mercado Común se fijan por ?unidades de cuenta? (que equivalen al dólar estadounidense), alteraciones de los tipos de cambio se reflejan directamente en alteraciones de los precios en moneda nacional. Por ello, se puede observar que variaciones de los tipos de cambio en la Comunidad Económica Europea (CEE) tienes repercusiones muy importantes para los consumidores y productores de bienes agrícolas. El presente trabajo no se ocupa de las consecuencias políticas de reajustes cambiarios, sino tiene por nnalidad analizar sus consecuencias económicas. En el capitulo primero, se describen algunos de los principales reglamentos de la política agraria común y se discuten algunas de las soluciones propuestas para aumentar la flexibilidad de los tipos de cambio. En el segundo capítulo, se entra en un análisis del presunto conflicto entre el principio de mantener un nivel de precios agrícolas común en la Comunidad y la necesidad de variar las paridades cambiarias. Además, se proponen algunas modificaciones factibles de la política agraria común. En el tercer capíitulo, se estudian las repercusiones de alteraciones de la paridad del marco alemán para los agricultures alemanes. El capíitulo final presenta un resumen de los resultados obtenidos a través de la investigacion. Concluye el trabajo con un apéndice estadíatico que recoge algunas series numéricas de importancia.

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Résumé Flexibilité des cours des changes et politique agraire commune (PAC) de la Communauté Economique Européenne. — Puisque les prix des produits agricoles dans le marché commun sont fixés en ?unités de compte? (dont la valeur correspond au dollar des Etats-Unis), les fluctuations des cours des changes sont reflétées directement par les équivalents nationaux de ces prix. Par conséquent, on peut observer que les fluctuations des cours des changes à l’intérieur de la Communauté Economique Européenne (CEE) exercent une influence trés marquée sur les producteurs et les consommateurs de produits agricoles. Le présent article ne s’occupe pas des facteurs politiques, mais seulement des conséquences économiques des fluctuations des cours des changes. Dans la premiére section, l’auteur décrit à grands traits les caractéristiques importantes de la PAC telle qu’elle se présente en ce moment, et il discute quelques-unes des méthodes qui ont été proposées pour augmenter le degré de flexibilité des cours des changes. Dans la seconde section, il examine le prétendu conflit entre l’idée d’un niveau commun des prix agricoles de la CEE et la nécessité d’ajuster les parités des changes. De plus, il propose certaines modifications possibles de la PAC. Dans la troisiéme section, l’auteur analyse l’effet, pour les agriculteurs allemands, des changement? dans la parité du DM par rapport aux autres monnaies européennes. Un chapitre final résume les conclusions, et certaines données importantes sont présentées dans une annexe.

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Riassunto Flessibilitá dei cambi e la politica agraria comune della Comunità Economica Europea. — Poiché i prezzi di prodotti agricoli sono fissati nel Mercato Comune in ?unità di conto? (che corrispondono nel valore al dollaro americano), variazioni di cambio si riflettono direttamente nel controvalore della valute nazionali. Perciò possono essere constatate all’interno della Comunità Economica Europea (CEE) ripercussioni economiche assai significative della variazioni dei cambi su consumatori e produttori di prodotti agricoli. Il presente studio non si occupa della conseguenze politiche, ma si concentra sui risultati economici della variazioni dei cambi. Nel primo capitolo sono esposte alcune della caratteristiche più importanti deli’attuale politica agricola comunitaria e discussi alcuni tra i diversi provvedimenti proposti per l’aumento della flessibilità dei cambi. Nel capitolo secondo viene esaminato il supposto conflitto tra l’abbozzo del livello dei prezzi agricoli comune per la Comunità e la necessità di adattamenti della parità dei cambi. Inoltre sono proposte alcune possibili modificazioni della politica agricola della Comunità. Il terzo capitolo analizza le ripercussioni di variazioni della parità del marco nei confronti di altre valute europee sugli agricoltori tedeschi. Un capitolo conclusivo riassume i risultati della ricerca, mentre alcune importanti serie numeriche sono raccolte in un’appendice.

     

Do Invesrtors Capture the Value Premium?

Do investors realize higher returns by investing in value stocks instead of gorwth stocks? Examination of a sample of equity indexes, mutual funds, and large‐cap stocks reveals no evidence that value firms have earned higher returns than growth firms. The value premium reported in the literarture is historically strongest for small‐capitalization firms, yea average annual rerturns for small‐cap equity funds are 14.10% for value funds compared to 14.52% for growth funds. Despite dramatic increases in mutual fund expense ratios from 1965 to 2001, fee differences across style funds cannot explain the absence of a value premium.     

SEASONALITY IN AUSTRALIAN SHARE PRICE INDICES BETWEEN 1936 AND 1957

There have been a number of Australian studies which have investigated monthly equity return seasonality from 1958 to the mid-1980s. This paper extends the Australian evidence on seasonality by examining equity returns between 1936 and 1957. The major finding of the study is that returns in January are consistently higher than returns in any other month, and that returns in February and June are consistently lower than returns in other months. There is also evidence that returns in July are higher, and in March are lower, than returns in other months. However, it is the January, February and June seasonals which are significant and these remain after taking account of seasonality in ex-dividend days.     

TURNING FARMERS INTO FORESTERS VIA MARKET LIBERALISATION

Reform of the Common Agricultural Policy and public concern over the environment have brought woodland into the public eye as an environment-friendly alternative land use in British agriculture. Survey evidence indicates that whilst it is the inadequacy of the returns from woodland that acts as the principal deterrent to planting, there are also a number of other factors that discourage woodland adoption. Of these, the perceived lack of flexibility that is associated with woodland figures highly. In part, loss of flexibility occurs due to the strength of controls such as felling licences and Tree Preservation Orders that restrict the conversion of woodland back to agricultural land. This paper develops a simple comparative static model of the way in which such restrictions impact on the allocation and price of woodland vis-à-vis agricultural land. Where felling controls are in operation they may reduce as well as preserve the area of woodland, and retard the efficacy of financial incentives. In this light, policymakers may do well to abolish felling restrictions on new woodland (possibly in conjunction with enhanced woodland incentives generally) if expansion of the wooded area is an explicit objective of future agricultural policy.