Optimales Vertragsdesign bei moralischem Risiko in der Rückversicherung

This paper addresses the optimal design of risk sharing arrangements in reinsurance contracts with asymmetric information concerning the primary insurer’s behavior. The latter usually has significant unobservable discretions, for instance with respect to risk selection, implying a moral hazard problem. We show that the existence of moral hazard strongly affects the characteristics of the reinsurance indemnification rule, i. e. the connection between the level of losses and the indemnity, which is specified in the contract. For this analysis, a standard model framework from the theory of optimal reinsurance with perfect information is modified by the assumption that the primary insurer has unobservable control of the probability distribution of the extent of losses. In particular, the solution indicates that for this situation, a Pareto-optimal indemnity rule is less steep, and therefore the primary insurer’s share in a marginal increase of the loss is greater, compared to the case of complete information. A deductible, however, turns out not to be a suitable approach in this context.     

Decentralization and Pay Reform in Central Government: a Study of Three Countries

Over the past decade central governments of the UK, Sweden and Australia have been engaged in significant reforms in the way they pay their employees. These reforms have generally taken the form of the decentralization of pay bargaining and the individualization of pay. This paper details the policies that have been implemented in central government in these countries and presents some preliminary results on the effects of these. While the actual implementation has varied quite substantially across the countries and the analysis of the outcomes must be regarded as preliminary, there is some evidence that the reforms have led to an increase in earnings dispersion.     

Financial innovation and international debt problems

Finaciial innovations are viewed almost universally as a new dimension in international debt management. The following article analyses the direct and indirect effects of using various types of new financial instrument to ease the debt burden. It considers the question whether new forms of international debt management might increase the effectiveness of debt relief programmes and examines specifically whether financial innovations such as debt-equit sswaps, debt-bond swaps and similar arrangements at the level of intergovernmental debtor-creditor relations can help overcome international debt problems.     

Real and perceived losses from unemployment: a cross-country study

This article compares the Unemployment Rate (UR) as a measure of inefficiency with several other potential measures across 18 Organization for Economic Co-operation and Development (OECD) countries. Results show that the UR is not a very good measure of relative inefficiency between countries, it overestimates the number of individuals who would get jobs if the market is clear, the Dead Weight Losses (DWLs) of UR are remarkably low even in high unemployment countries and the aggregate perceived monetary losses by the unemployed as a proportion of Gross Domestic Product (GDP) are also uniformly low, although inframarginal individuals in some countries may perceive their losses to be high.     

Importance of spatial proximity between venture capital investors and investees in Germany

Based on 1182 dyads of venture capitalists and German portfolio companies involved in a financing round between 2002 and 2007, the study here examines the importance of spatial proximity between investors and investees in a dense economy. Analysis of this data shows that the probability of a financing relationship decreases by 8% if the journey time increases by one standard deviation. For deals involving very small or very large investment sums, and for less experienced venture capitalists and lead investors, spatial proximity is particularly important. The results suggest that even in economies with a dense infrastructure such as Germany spatial proximity between investor and investee impacts the likelihood of an investment.     

Pricing by hedging and no-arbitrage beyond semimartingales

We show that pricing a big class of relevant options by hedging and no-arbitrage can be extended beyond semimartingale models. To this end we construct a subclass of self-financing portfolios that contains hedges for these options, but does not contain arbitrage opportunities, even if the stock price process is a non-semimartingale of some special type. Moreover, we show that the option prices depend essentially only on a path property of the stock price process, viz. on the quadratic variation. We end the paper by giving no-arbitrage results even with stopping times for our model class.      

TRUE UPPER BOUNDS FOR BERMUDAN PRODUCTS VIA NON-NESTED MONTE CARLO

We present a generic non-nested Monte Carlo procedure for computing true upper bounds for Bermudan products, given an approximation of the Snell envelope. The pleonastic "true" stresses that, by construction, the estimator is biased above the Snell envelope. The key idea is a regression estimator for the Doob martingale part of the approximative Snell envelope, which preserves the martingale property. The so constructed martingale can be employed for computing tight dual upper bounds without nested simulation. In general, this martingale can also be used as a control variate for simulation of conditional expectations. In this context, we develop a variance reduced version of the nested primal-dual estimator. Numerical experiments indicate the efficiency of the proposed algorithms.     

Dual pricing of multi-exercise options under volume constraints

In this paper, we study the pricing problem of multi-exercise options under volume constraints. The volume constraint is modelled by an adapted process with values in the positive integers, which describes the maximal number of rights to be exercised at a given time. We derive a representation of the marginal value of an additional nth right as a standard single stopping problem with a modified cash-flow process. This representation then leads to a dual pricing formula, which generalizes a result by Meinshausen and Hambly (Math. Finance 14:557–583, 2004) from the standard multi-exercise option (with at most one right per time step) to general constraints. We also state an explicit Monte Carlo algorithm for computing confidence intervals for the price of multi-exercise options under volume constraints and present numerical results for the pricing of a swing contract in an electricity market.     

Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?

We examine how UK listed companies set executive pay, reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour. We do this by considering current governance regulation in the light of interviews with protagonists in the debate, setting out the dilemmas faced by remuneration-setters, and showing how the processes they follow can lead to ethical conflicts.Current ‘best’ practice governing executive pay includes the use of market benchmarks to determine salary and bonus levels, significant levels of performance-related pay, the desire for executives to hold equity in their companies, the disclosure of total shareholder return compared to an index, and a perceived need for conformity, in order to grant legitimacy to policies. Whilst each of these may in some circumstances lead to good practice, each has the potential to cause dysfunctional behaviour in executives. Overall, we conclude that although best practice might drive good executive behaviour that coincides with the company’s and key stakeholders’ objectives, there are many reasons why it should not.