A performance analysis of participating life insurance contracts

Traditional life insurance products, in particular participating life insurance contracts, are often criticized. Their performance is often said to be poor compared to other investment alternatives. Interestingly, this perception appears to persist although very little research has been conducted into the performance of participating life insurance contracts. But are participating life insurance contracts actually bad for policyholders? We conduct a performance analysis based on contracts offered in the German market, in order to provide evidence to support decision making by policyholders.     

The performance of hedge funds and mutual funds in emerging markets

Use of short selling and derivatives is limited in most emerging markets because such instruments are not as readily available as they are in developed capital markets. These limitations raise questions about the value added provided by hedge funds, especially compared to traditional mutual funds active in these markets. We use five existing performance measurement models plus a new asset-style factor model to identify the return sources and the alpha generated by both types of funds. We analyze subperiods, different market environments, and structural breaks. Our results indicate that some hedge funds generate significant positive alpha, whereas most mutual funds do not outperform traditional benchmarks. We find that hedge funds are more active in shifting their asset allocation. The higher degree of freedom that hedge funds enjoy in their investment style might thus be one explanation for the differences in performance.     

Efficient forecast tests for conditional policy forecasts

Central Banks regularly make forecasts, such as the Fed’s Greenbook forecast, that are conditioned on hypothetical paths for the policy interest rate. While there are good public policy reasons to evaluate the quality of such forecasts, up until now, the most common approach has been to ignore their conditional nature and apply standard forecast efficiency tests. In this paper we derive tests for the efficiency of conditional forecasts. Intuitively, these tests involve implicit estimates of the degree to which the conditioning path is counterfactual and the magnitude of the policy feedback over the forecast horizon. We apply the tests to the Greenbook forecast and the Bank of England’s inflation report forecast, finding some evidence of forecast inefficiency. Nonetheless, we argue that the conditional nature of the forecasts made by central banks represents a substantial impediment to the analysis of their quality—stronger assumptions are needed and forecast inefficiency may go undetected for longer than would be the case if central banks were instead to report unconditional forecasts.     

Exchange rate forecasting: the errors we’ve really made

We examine the real-time forecasting performance of standard exchange rate models, using dozens of different vintages of data. Favorable evidence of long-horizon exchange rate predictability for the DM and Yen found in Mark (American Economic Review 1995;85:201-218) is present in only a two-year window of data vintages around that originally used. Approximately one-third of the improved forecasting performance over a random walk is eventually undone by data revisions. We also find the models consistently perform better using original release data than fully-revised data, and sometimes forecast better using real-time forecasts of future fundamentals instead of actual future fundamentals, contradicting a cherished presumption dating back to Meese and Rogoff (Journal of International Economics 1983;14:3-24).     

Transparency and Credibility: Monetary Policy With Unobservable Goals

We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and inferred from the policy outcome. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. This moderates the bank's policy and induces the bank to follow a policy closer to the socially optimal one. Full transparency of the central bank's intentions is generally socially beneficial but frequently worse for the bank. Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating influence on the bank and leads to the worst equilibrium.     

The high-frequency response of exchange rates and interest rates to macroeconomic announcements

The joint movements of exchange rates and U.S. and foreign term structures over short-time windows around macro announcements are studied using a 14-year span of high-frequency data. In order to evaluate whether the joint effects can be reconciled with conventional theory, the implications of these joint movements for changes in expected future exchange rates and changes in foreign exchange risk premia are deduced. For several real macro announcements, a stronger than expected release appreciates the dollar today, and must either (i) lower the risk premium for holding foreign currency rather than dollars, or (ii) imply net expected dollar depreciation over the ensuing decade.