The Impact of Catastrophes on Insurer Stock Volatility

This article investigates the impact of natural catastrophes and the 9‐11 attacks on (1) the volatility of insurance stocks and (2) the correlation of insurance stocks with the market. We find that natural catastrophes increase the volatility of insurance stocks. They also have a tendency to reduce the correlation of insurance stocks and the market. Investors can, consequently, diversify natural catastrophe risk by additionally holdings of a market portfolio. However, this does not hold for 9‐11. The events of 9‐11 led to increases in volatility and, simultaneously, to an increase in correlation. We also find evidence that 9‐11 increased the beta of insurance stocks.     

Regulations for the Eighth International Congress of Actuaries

Abstract

The present paper proposes and investigates a procedure for numerical evaluation of the transition probabilities for a time-inhomogeneous Markov process when the intensities are known (estimated). The procedure is based on Taylor-expansion of the transition probabilities linked with the Chapman-Kolmogorov equations.     

Intraday data and hedging efficiency in interest spread trading

Three government bond futures contracts and their respective 3-month interest rate futures contracts traded on LIFFE are examined. The data period covers three years of observations, January 1994-December 1996, sampled at half-hourly intervals. Borrowing from the calculation of minimum variance hedge ratios, half-hourly minimum variance spread ratios (the ratio of one contract to another, which provides the minimum variance) are estimated for the above contracts. The hypothesis under examination is whether there is any value-added in estimating minimum spread ratios based on intraday data. Three spread ratios are defined: two ratios calculated from daily data and a third one based on intraday data. Evidence tends to indicate that spread ratios calculated from intraday data exhibit a substantially lower variance than the other two spread ratio speciications. Thus, it is shown that intraday data, in comparison with daily data, allow for lower hedging costs. Moreover, the use of intraday-based spread ratios might be a contributing factor to reducing the maximum cumulative loss potentially incurred while holding a spread position.     

Efficiency tests with overlapping data: an application to the currency options market

This paper presents the results of an empirical study into the efficiency of the currency options market. The methodology derives from a simple model often applied to the spot and forward markets for foreign exchange. It relates the historic volatility of the underlying asset to the implied volatility of an option on the underlying at a specified prior time and then proceeds to test obvious hypotheses about the values of the coefficients. The study uses panel regression to address the problem of overlapping data which leads to dependence between observations. It also uses volatility data directly quoted on the market in order to avoid the biases which may occur when ‘backing out’ volatility from specific option pricing models. In general, the evidence rejects the hypothesis that the currency option market is efficient. This suggests that implied volatility is not the best predictor of future exchange rate volatility and should not be used without modification: the models presented in this paper could be a way of producing revised forecasts.     

The Use of Different Endorser Types in Advertising: A Content Analysis of Magazine Advertisements

Most of the literature assumes that endorsements, particularly by celebrities, are a frequently used advertising strategy. However, no study has yet investigated the use of the different endorser types identified by academic literature. This study seeks to close this research gap by analyzing German print advertisements. It finds that endorsement strategy in general is used much less than academic literature assumes, and that the relative significance of the different endorser types is incongruent to expectations. Moreover, the data suggest that, contrary to the literature's assumptions, credibility is not the most important underlying construct for endorsement advertisements, the endorser type used is frequently determined by the product category that is being advertised, and campaigns based on authenticity and similarity are gaining considerable importance in advertising practice.     

Economic and financial crises and the predictability of U.S. stock returns

We argue that the use of publicly available and easily accessible information on economic and financial crises to detect structural breaks in the link between stock returns and macroeconomic predictor variables improves the performance of simple trading rules in real time. In particular, our results suggest that accounting for structural breaks and regime shifts in forecasting regressions caused by economic and financial crises has the potential to increase the out-of-sample predictability of stock returns, the performance of simple trading rules, and the market-timing ability of an investor trading in the U.S. stock market.     

Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise

This paper addresses how overhead cost allocation system design in multinational enterprises (MNEs) is affected by transfer pricing tax regulation. Using a case study research strategy we find that the implementation of a transfer pricing tax compliance strategy gives rise to a number of changes to the overhead cost allocation system design. Findings suggests that a contingent relationship exists between overhead cost allocation and transfer pricing tax compliance. We argue that when seeking to understand and explain MNEs’ overhead cost allocation system design for intra-company services, the MNEs’ response to its tax regulatory environment is a significant explanatory variable.     

Merger policy and tax competition: the role of foreign firm ownership

In many situations, governments have sector-specific tax and regulation policies at their disposal to influence the market outcome after a national or an international merger has taken place. In this paper we study the implications for merger policy when countries non-cooperatively deploy production-based taxes and firms may be partly owned by foreigners. We find that when foreign firm ownership is low in the pre-merger situation, non-cooperative tax policies are more efficient after a national merger, and smaller synergy effects are needed for this type of merger to be proposed and cleared. In contrast, cross-border mergers dominate when the degree of foreign firm ownership is high initially. These results suggest a link between increasing international portfolio diversification and the rising share of cross-border mergers.     

Two-stage non Gaussian QML estimation of GARCH models and testing the efficiency of the Gaussian QMLE

In generalized autoregressive conditional heteroskedastic (GARCH) models, the standard identifiability assumption that the variance of the iid process is equal to 1 can be replaced by an alternative moment assumption. We show that, for estimating the original specification based on the standard identifiability assumption, efficiency gains can be expected from using a quasi-maximum likelihood (QML) estimator based on a non Gaussian density and a reparameterization based on an alternative identifiability assumption. A test allowing to determine whether a reparameterization is needed, that is, whether the more efficient QMLE is obtained with a non Gaussian density, is proposed.