A diffusion approximation for the ruin function of a risk process with compounding assets

Abstract

The traditional theory of collective risk is concerned with fluctuations in the capital reserve {Y(t): t ?O} of an insurance company. The classical model represents {Y(t)} as a positive constant x (initial capital) plus a deterministic linear function (cumulative income) minus a compound Poisson process (cumulative claims). The central problem is to determine the ruin probability ψ(x) that capital ever falls to zero. It is known that, under reasonable assumptions, one can approximate {Y(t)} by an appropriate Wiener process and hence ψ(.) by the corresponding exponential function of (Brownian) first passage probabilities. This paper considers the classical model modified by the assumption that interest is earned continuously on current capital at rate β > O. It is argued that Y(t) can in this case be approximated by a diffusion process Y*(t) which is closely related to the classical Ornstein-Uhlenbeck process. The diffusion {Y*(t)}, which we call compounding Brownian motion, reduces to the ordinary Wiener process when β = O. The first passage probabilities for Y*(t) are found to form a truncated normal distribution, which approximates the ruin function ψ(.) for the model with compounding assets. The approximate expression for ψ(.) is compared against the exact expression for a special case in which the latter is known. Assuming parameter values for which one would anticipate a good approximation, the two expressions are found to agree extremely well over a wide range of initial asset levels.     

The effect of earnings quality and country-level institutions on the value relevance of earnings

This study investigates the relationship between the value relevance of earnings and earnings quality across countries. We find that there is a stronger relationship between earnings quality and the value relevance of earnings in countries with high investor protection than in countries with weak investor protection. We also find that the association between the value relevance of earnings and earnings quality is higher when a country’s information environment is less opaque. Overall, our study documents evidence on international differences in the ability of stock prices to capture useful accounting information, consistent with the notion that the returns-earnings association reflects not only the quality of accounting earnings but also the informativeness of stock prices.     

Some basic questions on human rights and development

Concern in developed countries over human rights in the world has mainly focused on the first generation, or ‘civil’ rights, which circumscribe the actions of governments vis-a-vis the citizens. On the other hand, Third-World representatives have placed increasing emphasis on social, economic and cultural rights, which are really aspirations to be progressively achieved. With respect to these, because of scarcity of resources, choices often need to be made over the priority to be given to different aspirations (rights). These choices are similar to those involved in formulating development strategies, and (as with the latter) the concrete meaning given to these rights differs in different places. Much confusion has resulted from this, part of it deliberate and related to the fact that governments are parties to international agreements whose beneficiaries are supposedly the people, who may be repressed or exploited by those same governments. Though there is less ambiguity as regards the core of the ‘civil’ rights than over the ‘social’ rights, there are various reasons to emphasize the indivisibility of all human rights. In spite of the muddle, there is widespread consensus about the desirability of the progressive achievement of a widening range of such rights.     

Community participation for health: The case of Latin America

Current efforts at involving communities in health activities are analysed from a number of perspectives. Participation may be mainly aimed at easing resource constraints, through involvement in the implementation of health activities. Examples are the construction of health infrastructure, or the enlistment of community health workers — though in Latin America strong medical resistance to delegation has severely restricted their tasks. Participation in decision-making has been even more limited, with the exception of some small-scale NGO projects. Examples are next given of the differences that arise between projects with governmental or NGO sponsorship, or with a conservative or progressive orientation. Finally, the structure of the community, and the socio-political context in which it exists, are examined for the different constraints and opportunities they present to community participation for health.     

Exchanging market access at the outsiders' expense: the case of customs unions

Abstract.  Under a customs union, countries can exchange preferential market access by coordinating external tariffs to shift profits from excluded countries. I show that the exporting rents resulting from this coordination can offset trade diversion losses produced by the union, even if its members are relatively small in world markets. Such gains come, however, at the expense of excluded countries. I show that small countries can use customs unions also to foster multilateral cooperation, by increasing the incentives of excluded countries to support global free trade.