Overview

Abstract

From the inception of Social Security in 1935 to the present time, a variety of measures for evaluating the actuarial status of the program have been employed. In addition, how the results of these measures have been displayed and interpreted has also evolved. These results have had great influence on policymakers’ and the general public’s perceptions of the financial condition of the program. This paper is intended to be an update of my earlier paper on the same subject, that is, a historical review of the development of these methods and their interpretation. The paper closes with suggestions as to future changes in the measurement methods, in the light of possible future changes in the program itself.     

To Sustain a Vital and Vibrant Actuarial Profession

Abstract

Insurance markets are different from most other markets. Insurance markets have an inherent self-destructive tendency that can cause market failure. However, insurance markets not only exist, they thrive. This paper explores the essential role that actuaries play in countering problems that can cause market failure. Armed with our mathematical and business skills and strong sense of professionalism, actuaries are essential to the successful growth of insurance companies and insurance markets. The breakdown of barriers among segments of the financial services industry creates an opportunity for actuaries to apply these same skills to noninsurance financial institutions. Actuaries have a strong claim to becoming the profession the public relies upon to ensure that an adequate balance is kept between profits and solvency. The foundation of this claim is not the superiority of our intellectual tools. It is the advantages to society of actuaries as a well-defined, recognized group of trustworthy and professional financial managers.     

The Public Role of Actuaries in Private Pensions in Canada

Abstract

Actuaries have played prominent public roles in the development of occupational pension plans and social security arrangements in Canada. These roles include advising governments and government-appointed committees about regulatory structures, establishing funding standards, actively participating in regulatory functions, and pioneering valuation work for pension plans covering public sector employees. The formation in 1965 of the Canadian Institute of Actuaries led to the accreditation of actuaries in pension and tax legislation and to the development of actuarial standards of practice for pension work.     

Dynamic Fund Protection

Abstract

Dynamic fund protection provides an investor with a floor level of protection during the investment period. This feature generalizes the concept of a put option, which provides only a floor value at a particular time. The dynamic protection feature ensures that the fund value is upgraded if it ever falls below a certain threshold level. Gerber and Pafumi (2000) have recently derived a closed-form expression for the price of this protection when the basic portfolio follows geometric Brownian motion. In this paper we examine the pricing of this feature under the constant elasticity of variance process. Two approaches are used to obtain numerical results. First, we show how to extend the basic Monte Carlo approach to handle the particular features of dynamic protection. When a discrete-time simulation approach is used to value a derivative that is subject to continuous monitoring, there is a bias. We show how to remove this bias. Second, a partial differential equation approach is used to price dynamic protection. We demonstrate that the price of the dynamic protection is sensitive to the investment assumptions. We also discuss a discrete time modification of the dynamic protection feature that is suitable for practical implementation. The paper deals just with pricing and does not consider the important question of reserving for these contracts.     

Analysis of DJIA,S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery

This study examines the temporal behavior of price discovery in the spot, ETF and futures markets of the DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000. We document an increasing trend in the price discovery metrics of exchange traded funds for all indexes but the DJIA. Contrary to past studies, our findings show that the spot market rather than the futures market leads the price discovery. The arbitrage process that links exchange traded funds to spot prices, and not the futures prices might explain the results. This daily arbitrage that ensures exchange traded funds prices equal net asset values appear to promote spot market price discovery especially with the popularity of exchange traded funds in more recent years. We additionally document that the temporal behavior of the exchange traded funds price discovery metric affects differently price discovery in the spot and futures markets across indexes.     

Productivity Spillovers Through Foreign Transactions: The Role of Sector Composition and Local Conditions

We analyze the roles of inward foreign direct investment (FDI) and imports of capital goods as the main drivers of technology diffusion and productivity improvement in a sample of twenty-eight developing economies for the period 1999-2009. We examine changes in the sectoral composition of FDI as well as those local conditions that may facilitate technology adoption. Our results, obtained by the system generalized method of moments estimation method, suggest that the change of FDI from manufacturing to services is productivity enhancing. We also find that those countries with stronger institutions and better social and human development enjoy larger efficiency gains.     

Disagreement and asset prices

How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We also show that volatility in and of itself does not lead to higher trading volume. Instead, only when disagreement arises in the market is higher uncertainty associated with more trading. Finally, we are able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises.     

When to Use Loose or Tight Alliance Networks for Innovation? Empirical Evidence

This study examines the impact of different degrees of organizational coupling among the members of innovation alliance project networks on the commercial performance of collaborative innovations. Specifically, we study how type of innovation (modular vs. architectural innovation) moderates this relationship. Using data from 664 product innovation networks from five different industries in the United States, we find that the degree of organizational coupling among innovation network members significantly affects the commercial performance of collaborative innovations and that the type of innovation has a significant moderating effect. More specifically, the impact on commercial innovation performance of organizational coupling is positive for modular innovations and negative for architectural innovations.     

What Effect Did AIG's Bailout,and the Preceding Events,Have on Its Competitors?

We examine the effect of American International Group's (AIG) bailout, and the events leading up to it, on its insurance industry rivals. The reaction of rivals to AIG‐related events depends on the relative strength of two competing effects. The contagion effect implies that rival returns will decrease following negative events affecting AIG. In contrast, competitive effects will occur if investors expect that rivals will be able to benefit from AIG's downfall. Using three‐factor multivariate regression model event study methodology, we find evidence of both effects around several key dates in AIG's decline.