Reading List: Stock Market Volatility

Reading List
Stock Market Volatility

2009-2012

Institute and Faculty of Actuaries

December 2012

Compiled by Scott McLachlan
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iii

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Contents
ANALYSIS.......................................................................................................................................................... 1
ANNUITIES ....................................................................................................................................................... 1
ASSET ALLOCATION ........................................................................................................................................ 2
ASSET LIABILITY MATCHING ......................................................................................................................... 2
ASSETS .............................................................................................................................................................. 2
AUSTRALIA ....................................................................................................................................................... 2
AUTOMOBILE INDUSTRY ................................................................................................................................ 3
BENCHMARKING ............................................................................................................................................. 3
BOND PRICES ................................................................................................................................................... 3
BUSINESS CYCLES ............................................................................................................................................ 3
CAPITAL ASSET PRICING MODEL .................................................................................................................. 4
CAPITAL CHOICE ............................................................................................................................................. 4
CHANNELS OF DISTRIBUTION ....................................................................................................................... 4
CHILE ................................................................................................................................................................ 4
CONTRIBUTION RATE ..................................................................................................................................... 5
DEFINED BENEFIT SCHEMES ......................................................................................................................... 5
DERIVATIVES ................................................................................................................................................... 5
DISABILITY INSURANCE ................................................................................................................................. 6
EMERGING MARKETS ..................................................................................................................................... 6
EMPLOYMENT ................................................................................................................................................. 6
EQUITIES .......................................................................................................................................................... 7
EVALUATION.................................................................................................................................................... 7
EXCHANGE TRADED FUNDS (EFTS) .............................................................................................................. 7
FINANCIAL CRISES .......................................................................................................................................... 7
FINANCIAL MARKETS ..................................................................................................................................... 9
FINLAND ......................................................................................................................................................... 10
GERMANY ....................................................................................................................................................... 10
GOVERNMENT ............................................................................................................................................... 10
GUARANTEES ................................................................................................................................................. 10
HEDGE FUNDS ................................................................................................................................................ 11
HOUSING MARKET ........................................................................................................................................ 11
INDEXES ......................................................................................................................................................... 12
vi

INDIA .............................................................................................................................................................. 12
INSURANCE .................................................................................................................................................... 12
INSURANCE BROKING ................................................................................................................................... 13
INVESTMENT ................................................................................................................................................. 13
INVESTMENT ATTITUDES ............................................................................................................................ 13
LABOUR MARKET .......................................................................................................................................... 14
LABOUR SUPPLY ............................................................................................................................................ 14
LAW ................................................................................................................................................................. 14
LONG TERM CARE COVER ............................................................................................................................ 14
LOSSES ............................................................................................................................................................ 15
MACROECONOMICS ....................................................................................................................................... 15
MARKET STRUCTURE ................................................................................................................................... 15
MARKET TRENDS .......................................................................................................................................... 15
MATHEMATICAL MODELS ............................................................................................................................ 16
MODELLING ................................................................................................................................................... 16
MONETARY ECONOMICS .............................................................................................................................. 16
MORTGAGE INDEMNITY INSURANCE ......................................................................................................... 17
MORTGAGES ................................................................................................................................................... 17
MUTUAL FUNDS............................................................................................................................................. 17
OPTION PRICING ........................................................................................................................................... 17
PENSION REFORM ......................................................................................................................................... 18
PENSIONS ....................................................................................................................................................... 18
PORTFOLIO INVESTMENT ............................................................................................................................ 19
PORTFOLIO MANAGEMENT ......................................................................................................................... 19
PORTFOLIO PERFORMANCE ........................................................................................................................ 19
PRICE COMPETITION .................................................................................................................................... 20
PRICING .......................................................................................................................................................... 20
PRIVATE MEDICAL INSURANCE .................................................................................................................. 20
RATING ........................................................................................................................................................... 21
REFORM .......................................................................................................................................................... 21
REGULATION ................................................................................................................................................. 21
RETURNS ........................................................................................................................................................ 23
RISK ................................................................................................................................................................. 23
RISK AVERSION ............................................................................................................................................. 24
RISK CHARACTERISTICS ............................................................................................................................... 25
vii

SAVING ............................................................................................................................................................ 25
SOCIAL INSURANCE ...................................................................................................................................... 25
SOCIAL POLICY .............................................................................................................................................. 25
STANDARDS AND SPECIFICATIONS ............................................................................................................ 26
STOCHASTIC PROCESSES .............................................................................................................................. 26
STOCK CONTROL ........................................................................................................................................... 26
STOCK MARKET ............................................................................................................................................. 27
SYSTEMIC RISK .............................................................................................................................................. 28
UNEMPLOYMENT .......................................................................................................................................... 29
UNITED STATES ............................................................................................................................................. 29
VALUATION .................................................................................................................................................... 30
VALUE-AT-RISK (VAR) .................................................................................................................................. 30
VOLATILITY.................................................................................................................................................... 31

1

ANALYSIS

Pension plan solvency and extreme market movements: a regime switching approach : A background paper for discussion.
Freeman, Mark; Clacher, Iain; Hillier, David; Kemp, Malcolm H D; Abourashschi, Niloufar; Zhang, Qi (2012). - London: Institute and
Faculty of Actuaries, 2012. - 17 pages. [RKN: 43517]
Shelved at: ifp 06/12
The global credit crunch has forcefully highlighted the impact of extreme market events on both the asset and liability side of a
pension plan's balance sheet. Over the course of 2008 there were severe falls in global stock markets because of the financial
crisis and, in particular, the failure of Lehman Brothers. However, the dramatic collapse in pension plan solvency that was
observed in early 2009 was not caused solely by the signicant falls in the value of pension plan assets that had occurred. In March
2009 quantitative easing pushed bond yields signicantly lower, thereby increasing the present value of defined benefit pension
liabilities. As a consequence, the net funding position of defined benefit pension plans in the UK swung dramatically from a surplus
of 149.2bn in June 2007 to a deficit of 208.6bn in March 2009, back to a surplus of 35.5bn in February 2011 and then back to a
deficit again of 206.2bn in March 2012. These turbulent conditions highlighted the need to capture extreme market movements in
the modelling of future pension fund solvency risk. Traditional models of asset returns assume that the statistical parameters that
drive asset returns and interest rate changes remain constant over time. In these `one state' models, stock markets might produce
average returns of approximately 10% a year every year. It has recently been recognized that average returns, the variance of
returns and the covariances between returns to different asset classes can be more accurately modelled using parameters that
switch between more than one set of values. As a result, these multi-state' models are gaining in popularity as the benefits of
applying such models to practical problems, such as asset allocation decisions, are becoming increasingly recognized in a
number of fields. In particular, these models can capture rare, but extreme, market events, the time-variation in asset return
volatility and the "fat-tailed" nature of stock returns. We therefore model the future solvency of defined-benefit pension plans using
regime switching models and compare the outcomes with those of traditional one-state models. Our results show that future
projections of pension plan solvency are highly model-dependent. In particular, if discount rates are assumed to remain constant,
then regardless of the choice of model (one-state or multi-state) the probability of future deficits is dramatically under-stated
compared to forecasts where a stochastic discount rate process is used. Moreover, our results suggest that by allowing for
leptokurtosis in asset returns the probability of a future deficit is much greater. However, it is also important to note that allowing for
correlations between asset returns and the discount rate signifi_cantly reduces the assessed probability of underfunding in the
future.
http://www.actuaries.org.uk/sites/all/files/Print%20version%20Freeman%20et%20al%20080512vps.pdf

The relevance of emerging markets in portfolio diversification : Analysis in a downside risk framework. Kumar, S S S Palgrave
Macmillan, [RKN: 45746]
Shelved at: Per: J.Asset Man (Oxf)
Journal of Asset Management (2012) 13 (3) : 162-169.
During the global financial crisis of 2008, emerging markets declined almost to the same extent as developed markets, casting
doubts on their ability to provide diversification benefits. This article aims to assess the benefit of adding the volatility index, as an
asset class, instead of emerging markets to the domestic portfolios of US and UK investors. The results show that for both US and
UK investors, portfolios comprising volatility-based contracts outperform emerging markets portfolios on the basis of portfolio
performance metrics, such as the Sortino ratio, the Adjusted Sharpe ratio and the Stutzer index. The results imply that US
investors seeking risk reduction have an alternative investment opportunity in volatility-based contracts rather than investing in
emerging markets. Investing in emerging markets is fraught with political and exchange rate risks, whereas investing in the VIX is
free of these risks. Currently, there are no exchange-traded products on the FTSE 100 VIX. This study makes a case for
introducing them.

ANNUITIES

A Summary and Update of Developing Annuities Markets : The Experience of Chile. Rocha, Roberto; Rudolph, Heinz P (2010).
World Bank, 2010. - 45 pages. [RKN: 72637]
The rapid growth of the market for retirement products in Chile has its origins in the pension reform that was implemented in 1981.
But the successful development of an active annuity market also reflects many other factors. This paper summarizes and updates
an earlier longer study on the development of the Chilean annuity market. The update focuses on the numerous changes that
were introduced in 2008. The most striking aspect of the Chilean experience is the very high rate of annuitization. This has been
linked to the restrictions that have been applied to lump-sum withdrawals, the offer of inflation-protected annuities, and the robust
prudential regulation of providers. But the level of annuitization has also been supported by the annuitization incentives provided
to early retirees and the influence of brokers and sales agents. The recent regulatory changes have weakened the impact of the
last two factors, while strengthening the demand for annuities at normal retirement.
http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2010/06/01/000158349 20100601090117/Rendere
d/PDF/WPS5325.pdf

2

ASSET ALLOCATION

What is the impact of stock market contagion on an investors portfolio choice?. Branger, Nicole; Kraft, Holger; Meinerding,
Christoph - 19 pages. [RKN: 72377]
Shelved at: Per: IME (Oxf)
Insurance: Mathematics & Economics (2009) 45 (1) : 94-112.
Available from Athens: ScienceDirect
Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of
crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on the
portfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantly
adjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span between
jumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoring
contagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utility
losses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not trade
derivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors security demands, since it
reduces their ability to diversify their portfolios.
Keywords: Asset allocation; Jumps; Contagion; Model risk
http://www.openathens.net

ASSET LIABILITY MATCHING

Market consistency. Model calibration in imperfect markets. Kemp, Malcolm H D (2009). - Chichester: Wiley, 2009. - xxv,350
pages. [RKN: 39382]
Shelved at: CPFB (Lon) Shelved at: 332.041 KEM
Achieving market consistency can be challenging, even for the most established finance practitioners. In "Market Consistency:
Model Calibration in Imperfect Markets", leading expert Malcolm Kemp shows readers how they can best incorporate market
consistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the book
explores how risk management and related disciplines might develop as fair valuation principles become more entrenched in
finance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio construction
models to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used,
what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains why
market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging
parameters, and provides solutions to even the most complex problems.

The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvency
and other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthiness
of governments is no longer undoubted; and, it explores when practitioners should focus most on market consistency and when
their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulation
and risk management within different parts of the financial services industry, identifying how and why market consistency is key to
these topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds may
not be the same as for other financial market participants such as banks and asset managers

ASSETS

Retirement Security and the Stock Market Crash: What Are the Possible Outcomes?. Butrica, Barbara A.; Smith, Karen E; Toder,
Eric J (2009). - Chestnut Hill: Center for Retirement Research at Boston College, 2009. - 49 pages. [RKN: 71942]
This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocks
remain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941-45 and 22 percent of late boomers born 1961-65
would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to
14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly, to 19
percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed their
stock market losses.
http://crr.bc.edu/images/stories/wp 2009-30.pdf

AUSTRALIA

Quasi-markets and service delivery flexibility following a decade of employment assistance reform in Australia. Considine, Mark;
Lewis, Jenny M; O'Sullivan, Siobhan [RKN: 45453]
Shelved at: Per: JSP (Oxford)
Journal of Social Policy (2011) 40 (4) : 811-833.
Available via Athens: Cambridge Journals
In 1998, we were witnessing major changes in frontline social service delivery across the OECD and this was theorised as the
emergence of a post-Fordist welfare state. Changes in public management thinking, known as New Public Management (NPM),
informed this shift, as did public choice theory. A 1998 study of Australia's then partially privatised employment assistance sector
provided an ideal place to test the impact of such changes upon actual service delivery. The study concluded that frontline staff
3

behaviour did not meet all the expectations of a post-Fordist welfare state and NPM, although some signs of specialisation,
flexibility and networking were certainly evident (Considine, 1999). Ten years on, in 2008, frontline staff working in Australia's now
fully privatised employment sector participated in a repeat study. These survey data showed convergent behaviour on the part of
the different types of employment agencies and evidence that flexibility had decreased. In fact, in the ten years between the two
studies there was a marked increase in the level of routinisation and standardisation on the frontline. This suggests that the sector
did not achieve the enhanced levels of flexibility so often identified as a desirable outcome of reform. Rather, agencies adopted
more conservative practices over time in response to more detailed external regulation and more exacting internal business
methods.
http://www.openathens.net/

AUTOMOBILE INDUSTRY

Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. Tennyson,
Sharon [RKN: 39618]
Shelved at: Per: Geneva (Oxf)
Geneva Risk and Insurance Review (2010) 35 (1) : 19-46.
Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk
consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and
tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The
empirical analysis uses 19902003 rating cell-level data from the Massachusetts automobile insurance market, in which
regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to
be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.

BENCHMARKING

Benchmarks as limits to arbitrage: understanding the low-volatility anomaly. Baker, Malcolm; Bradley, Brendan; Wurgler, Jeffrey
[RKN: 45094]
Shelved at: Per: FAJ (Oxf)
Financial Analysts Journal (2011) 67, 1 (Jan/Feb) : 40-54.
Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility
stocks. This anomaly may be partly explained by the fact that the typical institutional investor's mandate to beat a fixed benchmark
discourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.

BOND PRICES

International financial transmission: emerging and mature markets. Felices, Guillermo; Grisse, Christian; Yang, Jing (2009). Bank
of England, 2009. - 43 pages. [RKN: 69967]
Shelved at: Online only Shelved at: Online only
1997 onwards available online. Download as PDF.
With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affect
financial markets worldwide. The aim of this paper is to quantify the co-movements between bond markets in the US and emerging
market economies using daily data from prior to the East Asian crisis through to the early stages of the current global financial
crisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We find
that shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the short
run (consistent with flight to quality' effects), while shocks that increase US interest rates raise EMBIG spreads over longer
horizons (consistent with financing cost' or search for yield' effects). We also find that shocks that increase EMBIG spreads tend
to widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emerging
market economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates can
explain around 60%-70% of the variation of EMBIG and US high-yield spreads.
http://www.bankofengland.co.uk/publications/workingpapers/index.htm

BUSINESS CYCLES

Manias, panics and crashes : a history of financial crises. Kindleberger, Charles P; Aliber, Robert Z (2011). - 6th ed. - Basingstoke:
Palgrave Macmillan, 2011. - viii, 356 p pages. [RKN: 45150]
Shelved at: EB/JNH/6 (Lon)
This sixth edition has been revised and expanded to bring the history of financial crisis up to date, covering such topics as
speculative manias, the lender of last resort and the case of Lehman Brothers.

4

CAPITAL ASSET PRICING MODEL

Calibration of stock betas from skews of implied volatilities. Fouque, Jean-Pierre; Kollman, Eli [RKN: 45256]
Applied Mathematical Finance (2011) 18 (1-2) : 119-137.
Available via Athens: Taylor & Francis Online
We develop call option price approximations for both the market index and an individual asset using a singular perturbation of a
continuous-time capital asset pricing model in a stochastic volatility environment. These approximations show the role played by
the asset's beta parameter as a component of the parameters of the call option price of the asset. They also show how these
parameters, in combination with the parameters of the call option price for the market, can be used to extract the beta parameter.
Finally, a calibration technique for the beta parameter is derived using the estimated option price parameters of both the asset and
market index. The resulting estimator of the beta parameter is not only simple to implement but has the advantage of being
forward looking as it is calibrated from skews of implied volatilities.

CAPITAL CHOICE

Raising capital in an insurance oligopoly market. Hardelin, Julien; Lemoyne de Forges, Sabine - 26 pages. [RKN: 74943]
We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty.
Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game
where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame
perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model
with regard to the insurance industry specificities and regulation.

CHANNELS OF DISTRIBUTION

Market design for the provision of social insurance: the case of disability and survivors insurance in Chile. Reyes, Gonzalo
(2010). 2010. - 24 pages. [RKN: 72696]
Shelved at: Per: J.PEF (Oxf) Shelved at: JOU/PEN
Journal of Pension Economics & Finance (2010) 9 (3) : 421-444.
Available from Athens: Cambridge Journals
As part of the pension reform recently approved in Chile, the government introduced a centralized auction mechanism to provide
the Disability and Survivors (D&S) Insurance that covers recent contributors among the more than eight million participants in the
mandatory private pension system. This paper is intended as a case study presenting the main distortions found in the
decentralized operation of the system that led to this reform and the challenges faced when designing a competitive auction
mechanism to be implemented jointly by the Pension Fund Managers (AFP). When each AFP independently hired this insurance
with an insurance company, the process was not competitive: colligated companies ended up providing the service and distortions
affected competition in the market through incentives to cream-skim members, efforts to block disability claims, lack of price
transparency, and the insurance contract acting as a barrier to entry. Cross-subsidies, inefficient risk pooling, and regulatory
arbitrage were also present. The Chilean experience is relevant since other privatized systems with decentralized provision of this
insurance may show similar problems as they mature. A centralized auction mechanism solves these market failures, but also
gives raise to new challenges, such as how to design a competitive auction that attracts participation and deters collusion. Design
features that were incorporated into the regulation to tackle these issues are presented here.

CHILE

(2010). 2010. - 24 pages. [RKN: 72696]
5


A Summary and Update of Developing Annuities Markets : The Experience of Chile. Rocha, Roberto; Rudolph, Heinz P (2010).
World Bank, 2010. - 45 pages. [RKN: 72637]
The rapid growth of the market for retirement products in Chile has its origins in the pension reform that was implemented in 1981.
But the successful development of an active annuity market also reflects many other factors. This paper summarizes and updates
an earlier longer study on the development of the Chilean annuity market. The update focuses on the numerous changes that
were introduced in 2008. The most striking aspect of the Chilean experience is the very high rate of annuitization. This has been
linked to the restrictions that have been applied to lump-sum withdrawals, the offer of inflation-protected annuities, and the robust
prudential regulation of providers. But the level of annuitization has also been supported by the annuitization incentives provided
to early retirees and the influence of brokers and sales agents. The recent regulatory changes have weakened the impact of the
last two factors, while strengthening the demand for annuities at normal retirement.
http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2010/06/01/000158349 20100601090117/Rendere
d/PDF/WPS5325.pdf

CONTRIBUTION RATE

Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints. Maurer,
Raimond; Mitchell, Olivia S; Rogalla, Ralph - 10 pages. [RKN: 72369]
Using a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to
a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we
integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension managers objective of controlling
contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and
prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility
while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess
the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public
pension system can be beneficial for both civil servants and taxpayers.
Keywords: Public pensions; Defined benefit; Funding; Investing; Contribution rate risk; Conditional Value at Risk

DEFINED BENEFIT SCHEMES


DERIVATIVES

Corrections to the prices of derivatives due to market incompleteness. German, David [RKN: 45258]
We compute the first-order corrections to marginal utility-based prices with respect to a 'small' number of random endowments in
the framework of three incomplete financial models. They are a stochastic volatility model, a basis risk and market portfolio model
and a credit-risk model with jumps and stochastic recovery rate.

6

DISABILITY INSURANCE

(2010). 2010. - 24 pages. [RKN: 72696]

EMERGING MARKETS

introducing them.

EMPLOYMENT

methods.

7

EQUITIES

Do implied volatilities predict stock returns?. Ammann, Manuel; Verhofen, Michael; Suss, Stephan (2009). 2009. - 13 pages. [RKN:
71585]
Using a complete sample of US equity options, we find a positive, highly significant relationship between stock returns and lagged
implied volatilities. The results are robust after controlling for a number of factors such as firm size, market valuation, analyst
recommendations and different levels of implied volatility. Lagged historical volatility is in contrast to the corresponding implied
volatility not relevant for stock returns. We find considerable time variation in the relationship between lagged implied volatility
and stock returns.
Keywords: implied volatility, expected returns, market efficiency

Exchange-traded funds, market structure, and the flash crash. Madhavan, Ananth [RKN: 45820]
Shelved at: Per: FAJ
Financial Analysts Journal (2012) 68(4) : 20-35.
The author analyzes the relationship between market structure and the flash crash. The proliferation of trading venues has
resulted in a market that is more fragmented than ever. The author constructs measures to capture fragmentation and shows that
they are important in explaining extreme price movements. New market structure reforms should help mitigate such market
disruptions in the future but have not eliminated the possibility of another flash crash, albeit with a different catalyst.

EVALUATION

Evaluation of the Basel VaR-based market risk charge and proposals for a needed adjustment. Fricke, Jens; Pauly, Ralf [RKN:
45848]
Shelved at: Per (Oxf)
Journal of Risk Management in Financial Institutions (2012) 5(4) : 398-420.
Available via Athens: MetaPress
This analysis shows that in high risk situations the Basel II guidelines fail in the attempt to cushion against large losses by higher
capital requirements. One of the factors causing this problem is that the built-in positive incentive of the penalty factor resulting
from the Basel backtesting is set too weak. Therefore, this paper proposes a new procedure for market risk regulation and it
demonstrates how this works with real time series. A comparison study shows that contrary to the existing Basel regulation the
proposition presented here has the intended quality as a built-in incentive for choosing a reliable forecasting model. By including
the expected shortfall as a further measure of risk this paper's concept yields a steeper increase of the penalty factor and as a
consequence a stronger effect of risk underestimation on the capital requirement. The recent proposal of the Basel Committee on
Banking Supervision may have the same weakness as the Basel II regulation because it is constructed in an analogous manner.

EXCHANGE TRADED FUNDS (EFTS)


FINANCIAL CRISES

Legal and regulatory update : Global identification standards for counterparties and other financial market participants. Grody,
Allan D; Hughes, Peter J; Reininger, Daniel [RKN: 45711]
Financial regulators are focused on observing systemic risk across enormously complex interconnected global financial
institutions. It is understood that without an ability to view the underlying positions and cash flows, valued in standard ways and
aggregated by counterparty through common identifiers, neither risk triggers nor risk exposures can be observed nor can systemic
threats be detected. It has been accepted by regulators that the very first pillar of global financial reform is a standard for
identifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique and
standardised legal entity identifier (the LEI) is the first step. This paper reports on past and current efforts to develop a global
identification system for such a purpose. The authors argue for a government/industry partnership in which governance is shared
and operating elements of the global identification system are compartmentalised for control, security and confidentiality
8

purposes. The paper demonstrates a proposed global identification system that satisfies all known elements of regulators'
requirements for the LEI and also lays the foundation for accommodating other attributes, such as business ownership
hierarchical structures and contract and instrument identification.

Lessons from the financial crisis: insights from the defining economic event of our lifetime. Berd, Arthur M (ed.) (2010). -
London: Incisive Financial Publishing Ltd; Risk Books, 2010. - xlv, 605 pages. [RKN: 43535]
Shelved at: JNH/EB/313 (Lon)


Regulating financial markets : Protecting us from ourselves and others. Statman, Meir [RKN: 39212]
Financial Analysts Journal (2009) 65, 3 (May/June) : 22-31.
The current global financial and economic crisis highlights the ongoing tug-of-war between those who pull toward free markets and
those who pull toward strict regulation of marketsbetween those who pull toward libertarianism and those who pull toward
paternalism. Rising stock markets and economic prosperity empower those who favor free markets and libertarianism; stock
market crashes and economic recessions empower those who favor strict regulation and paternalism. This article discusses the
current crisis against the backdrop of earlier crises and focuses on margin regulations, which limit leverage; suitability regulations,
which require providers of financial products to act in the interests of their clients; blue-sky laws, which prohibit securities deemed
unfair or unduly risky; and mandatory-disclosure regulations, which require providers of financial products to disclose pertinent
information even if potential buyers do not ask for it.

introducing them.


Verdict on the crash : Causes and policy implications. Booth, Philip; Alexander, James; Beenstock, Michael; Butler, Eamonn;
Congdon, Tim; Copeland, Laurence; Dowd, Kevin; Grenwood, John; Gregg, Samuel; Kay, John; Llewellyn, David T; Morrison, Alan D;
Myddelton, D R; Schwartz, Anna J; Wood, Geoffrey (2009). - London: Institute of Economic Affairs, 2009. - 199 pages. [RKN: 39340]
Shelved at: JNH/313 (Lon)
This book challenges the myth that the recent banking crisis was caused by insufficient statutory regulation of financial markets.
Though it finds that statutory regulation failed, and that market participants took more risks than they should have done, it appears
that statutory regulation made matters worse rather than better. Furthermore the fifteen experts who have contributed to this study
find that government policy failed in other respects too. As with the boom and bust that led to the Great Depression, loose
monetary policy on both sides of the Atlantic helped to promote an asset price bubble and credit boom which, at some stage, was
bound to have serious consequences. Rejecting the failed approach of discretionary detailed regulation of the financial system,
the authors instead propose specific and incisive regulatory tools that are designed to target, in a non-intrusive way, particular
weaknesses in a banking system that is backed by deposit insurance. This study, by some of the most eminent authors in the field,
is essential reading for all those who are interested in the policy implications of recent events in financial markets.

9

FINANCIAL MARKETS




Panic: the story of modern financial insanity. Lewis, Michael (2009). - New York: W. W. Norton & Company, 2009. - 391 pages.
[RKN: 38665]
Shelved at: EA (Lon)
Review: RKN 39106
The author has chosen more than fifty pieces of brilliant journalism to illuminate the most violent and costly upheavals in recent
financial history to be included in this book. Some paint the mood and market factors leading up to the particular crash, or show
what people thought was happening at the time. Others analyze what actually happened.


Systemic risk, multiple equilibriums, and market dynamics: What you need to know and why. El-Erian, Mohamed A; Spence,
Michael (2012). 2012. [RKN: 45857]
Using an array of real-life examplesincluding the current sovereign debt crisis in the eurozonethe authors analyze the
underlying dynamics of the periodic bouts of systemic path dependence that affect not only financial markets (their functioning and
stability, investment returns, and volatility) but also investment strategy itself. Their analysis explains how sudden shifts in
expectations can morph into particularly disruptive multiple-equilibrium dynamics and points to possible implications for market
outcomes, market equilibriums, and policy responses.


10

FINLAND

Enhancement of value portfolio performance using momentum and the long-short strategy: the Finnish evidence. Leivo, Timo H;
Patari, Eero J Palgrave Macmillan, [RKN: 45100]
This article examines the added value of combining price momentum with various value strategies in the Finnish stock market
during the period 1993-2008. The results show that taking into account the price momentum of value stocks enhances portfolio
performance. Among the best-performing portfolios, the performance improvement resulting from the inclusion of a momentum
indicator is the greatest for value portfolios that are formed on the basis of three-composite value measures. The risk-adjusted
performance of the best value winner portfolios can be enhanced further by following the 130/30 long-short strategy. The best
long-short portfolios significantly outperform the corresponding long-only value winner portfolios and more than double the
average return of the stock market coupled with the volatility decrease.

GERMANY


GOVERNMENT



GUARANTEES

11

future.

HEDGE FUNDS

Indian stock market volatility in recent years : Transmission from global market, regional market and traditional domestic
sectors. Sarkar, Amitava; Chakrabarti, Gagari; Sen, Chitrakalpa [RKN: 39145]
Estimation of financial models of hedge fund returns often gives rise to abnormally high alphas. This phenomenon may be due to
mis-specified models, but recently the introduction of volatility factors in hedge fund returns models (Kuenzi and Xu, 2007) has
been viewed as a solution to solve the alpha puzzle. This paper shows that modelling the volatility of the innovation term of hedge
fund return models might be another way to explain the alpha puzzle. The model proposed in this paper is a factor model that
incorporates an 'alternative' factor, which is the return of a short put on the Standard & Poor's 500 whose volatility is the VIX. This
paper takes an overall view to analyse the problem of specification errors in financial models. To account for specification errors,
it proposes a new estimator based on the generalised method of moments (GMM) whose instruments are the higher moments of
returns, the GMM-hm. Some transformations of the basic factor model, which are recommended in the financial literature to
improve the estimation of the alpha, are considered the n-CAPM and the conditional model. Some GARCH and EGARCH
specifications of our basic model of returns are also estimated. Our results show that modelling the volatility of the innovation is the
best way to lower the alpha. The n-CAPM has also had some success in reducing the alpha. The alpha is not the only garbage bag
of a returns model (Jaeger and Wagner, 2005), but the alpha and the innovation both constitute the garbage bag.

HOUSING MARKET

Estimation of housing price jump risks and their impact on the valuation of mortgage insurance contracts. Chen, Ming-Chi;
Chang, Chia-Chien; Lin, Shih-Kuei; Shyu, So-De [RKN: 39628]
Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU
Journal of Risk and Insurance (2010) 77 (2) : 399-422.
Available from Athens: Wiley Online Library
Housing price jump risk and the subprime crisis have drawn more attention to the precise estimation of mortgage insurance
premiums. This study derives the pricing formula for mortgage insurance premiums by assuming that the housing price process
follows the jump diffusion process, capturing important characteristics of abnormal shock events. This assumption is consistent
with the empirical observation of the U.S. monthly national average new home returns from 1986 to 2008. Furthermore, we
investigate the impact of price jump risk on mortgage insurance premiums from shock frequency of the abnormal events,
abnormal mean and volatility of jump size, and normal volatility. Empirical results indicate that the abnormal volatility of jump size
has the most significant impact on mortgage insurance premiums.

Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation. S, Filipa; Towbin,
Pascal; Wieladek, Tomasz (2011). - London: Bank of England, 2011. - 42 pages. [RKN: 73716]
A number of OECD countries experienced an environment of low interest rates and a rapid increase in
housing market activity during the last decade. Previous work suggests three potential explanations for
these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive
financial innovation combined with inappropriately lax financial regulation. In this study we examine
the effects of these three factors on the housing market. We estimate a panel VAR for a sample of
OECD countries and identify monetary policy and capital inflows shocks using sign restrictions.
To explore how these effects change with the structure of the mortgage market and the degree of
securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics.
Our results suggest that both types of shocks have a significant and positive effect on real house prices,
real credit to the private sector and real residential investment. The responses of housing variables to
both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling
the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is
particularly strong for capital inflows shocks, increasing the response of real house prices, residential
investment and real credit by a factor of two, three and five, respectively.
12

http://www.bankofengland.co.uk/publications/workingpapers/

INDEXES

Short positions, rally fears and option markets. Eberlein, Ernst; Madan, Dilip B [RKN: 39519]
Available from Athens: Taylor and Francis
Index option pricing on world market indices are investigated using Levy processes with no positive jumps. Economically this is
motivated by the possible absence of longer horizon short positions while mathematically we are able to evaluate for such
processes the probability of a rally before a crash. Three models are used to effectively calibrate index options at annual maturity,
and it is observed that positive jumps may be needed for FTSE, N225 and HSI. Rally before a crash probabilities are shown to
have fallen by 10 points after July 2007. Typical implied volatility curves for such models are also described and illustrated. They
have smirks and never smile.

INDIA

Do macro-economic variables explain stock-market returns? : Evidence using a semi-parametric approach. Mishra, Sagarika;
Singh, Harminder Palgrave Macmillan, [RKN: 45675]
In this article we test whether the stock market in India is driven by macro-economic fundamentals. We use a non-parametric
approach to determine whether any variables are nonlinearly related with stock returns and the variability of stock returns by taking
monthly observations from 1998 to 2008. We consider exchange rate, interest rate, industrial production, inflation and foreign
institutional investments as macro-economic factors. Further, we employ a semi-parametric approach to see whether any of the
macro-variables have a significant nonlinear impact on the stock return and on the variability of stock return. Our results suggest
that of the Ordinary Least Square and semi-parametric approaches, the semi-parametric approach better explains the stock
returns and volatility.

INSURANCE

Sharon [RKN: 39618]

State involvement in insurance markets. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 32
pages. [RKN: 74774]
Shelved at: JOU
Sigma (2011) 3
More and more governments are leveraging private insurance skills and the growing capacity of the sector to cover catastrophe
losses as well as a wide range of other risks, Swiss Re reveals in its latest sigma research publication. The Japanese earthquake
tragedy earlier this year caused more than USD 200 billion in total property losses, but only USD 30 billion was covered by private
insurance. In contrast, private insurers will pay about USD 9 billion of the USD 12 billion in total property losses from the recent
Christchurch, New Zealand earthquake.
http://www.swissre.com

13

INSURANCE BROKING

Market reaction to regulatory action in the insurance industry : The case of contingent commission. Cheng, Jiang; Elyasiani,
Elyas; Lin, Tzu-Ting [RKN: 39626]
We examine the market's reaction to New York Attorney General Eliot Spitzer's civil suit against mega-broker Marsh for bid rigging
and inappropriate use of contingent commissions within a generalized autoregressive conditionally heteroskedastic (GARCH)
framework. Effects on the stock returns of insurance brokers and insurers are tested. The findings are: (1) GARCH effects are
significant in modeling broker/insurer returns; (2) the suit generated negative effects on the brokerage industry and individual
brokers, suggesting that contagion dominates competitive effects; (3) spillover effects from the brokerage sector to insurance
business are significant and mostly negative, demonstrating industry integration; and (4) information-based contagion is
supported, as opposed to the pure-panic contagion.

INVESTMENT

Retirement savings guidelines for residents of emerging market countries. Meng, Channarith; Pfau, Wade Donald - 10 pages.
[RKN: 74905]
Shelved at: JOU
Pensions: An International Journal (2011) 16 (4) : 256-265.
Available online via Athens: Palgrave

Most literature about retirement planning treats the working (accumulation) and retirement (decumulation) phases separately. The
traditional approach decides on a safe withdrawal rate, uses it to derive a wealth accumulation target and then calculates the
savings rate required to achieve this wealth target. Because low sustainable withdrawal rates tend to occur after bull markets,
such a formulation will push individuals toward unnecessarily high savings rates to attain their desired retirement spending goals,
reducing their feasible lifestyle before retirement. By jointly considering both phases of retirement planning, this study provides
savings rate guidelines for individuals in 25 emerging market countries. The savings rates calculated here are those that provide
an adequate success rate in financing desired retirement expenditures using bootstrapped Monte Carlo simulations. For many
emerging market countries, these savings rates will be high, given the high volatility of returns for savings instruments and the
inflationary environment. Starting to save early and using a relatively low stock allocation, a finding that contrasts with studies
about the United States, provide the lowest necessary savings rate for a given probability of success.

When is stock picking likely to be successful? : Evidence from Mutual Funds. Duan, Ying; Hu, Gang; McLean, R David [RKN:
39004]
Financial Analysts Journal (2009) 65, 2 (March/April) : 55-66.
Consistent with a costly arbitrage equilibrium in which arbitrage costs insulate mispricing, this study finds that mutual fund
managers have stock-picking ability for stocks with high idiosyncratic volatility but not for stocks with low idiosyncratic volatility.
These findings suggest that fund managers and other investors may want to pay special attention to high-idiosyncratic-volatility
stocks because they provide fertile ground for stock picking. The study also finds that the stock-picking ability of the average
mutual fund manager declined after the extreme growth in the number of both mutual funds and hedge funds in the late 1990s.

INVESTMENT ATTITUDES


14

LABOUR MARKET

Labour market institutions and unemployment volatility: evidence from OECD countries. Faccini, Renato; Bondibene, Chiara
Rosazza (2012). - London: Bank of England, 2012. - 45 pages. [RKN: 70093]
Using publicly available data for a group of 20 OECD countries, we find that the cyclical volatility of the unemployment rate exhibits
substantial cross-country and time variation. We then investigate empirically whether labour market institutions can account for
this observed heterogeneity and find that the impact of various institutions on cyclical unemployment dynamics is quantitatively
strong and statistically significant. The hypothesis that labour market institutions could increase the volatility of unemployment by
reducing match surplus is not supported by the data. In fact, unemployment benefits, taxation and employment protection appear
to reduce the volatility of unemployment rates. In addition, we find that the precise nature of union bargaining has important
implications for cyclical unemployment dynamics, with union coverage and density having large and offsetting effects. Finally, we
provide evidence suggesting that interactions between shocks and institutions matter for cyclical unemployment fluctuations.
However, institutions only account for about one quarter of the explained variation, which implies that they are important but they
are not the entire story.

LABOUR SUPPLY

Labor Market Uncertainty and Pension System Performance. Mitchell, Olivia S; Turner, John A (2009). Pension Research Council,
2009. - 34 pages. [RKN: 72007]
The financial market crisis has prompted policymakers to devote substantial attention to ways in which capital market risks shape
pension performance, but few analysts have asked how shocks to human capital shape retirement wellbeing. Yet human capital
risks due to fluctuations in labor earnings, employment volatility, and survival, can have a profound influence on pension
accumulations and payouts. This paper reviews existing studies and offers a framework to think about how human capital risk can
influence pension outcomes. We conclude with thoughts on how future analysts can better assess sensitivity of pension plan
outcomes to a labour income uncertainty.

LAW


LONG TERM CARE COVER

The market potential for privately financed long term care products in the UK. Mayhew, Leslie (2009). - London: City University
School of Mathematics, 2009. - 37 pages. [RKN: 69926]
This paper considers the market potential for privately financed long term care products in the UK. It finds that since the present
market is undeveloped there is scope to increase the range of products available to suit people with different means and
circumstances. Currently the UK spends about 19 billion on long term care (LTC) of which around a third is privately funded and
two thirds publicly funded. The cost of informal care for older people is estimated to be worth 58 billion a year making a total of
77 billion. The paper finds that very few people can afford to pay for LTC out of their own pockets from income alone, but that this
number is increased if savings are taken into account and significantly increased if housing wealth is included as well. Insurance
for LTC is normally considered to be part of the product mix usually associated with the private funding of LTC. However, as the
US market demonstrates, LTC insurance products can be complex and difficult to understand and yet still not meet all needs,
whilst US research suggests that policies are also over priced and unaffordable for many. In this paper the case is made for other
kinds of products which produce an income at the point of need and therefore make a contribution towards LTC costs. These
products include equity release, top up insurance, disability linked annuities, and immediate needs annuities. Although they may
not cover all possible risks, and therefore all needs, they would bring much needed new money into LTC as well as lead to an
increase in personal responsibility. With large numbers of older people on very low incomes not everybody would be able to afford
these products and so the concept of LTC bonds is considered. These would work like premium bonds and pay prizes but would
only be cashable at the point of need. Taken together all of the products considered would extend choice and there would be
something to meet most circumstances. The governments role would be five fold: (1) to facilitate the introduction of the LTC
15

products and provide regulation; (2) to provide appropriate incentives for people to take them up; (3) to clarify the role of the state
in terms of the minimum entitlement people can expect; (4) to make it easier to get advice and direction at points of initial contact,
for example with social and health care services; and (5) to cover risks that the market cannot handle.
http://www.cass.city.ac.uk/ data/assets/pdf file/0008/37178/188ARP.pdf

LOSSES


MACROECONOMICS


MARKET STRUCTURE


MARKET TRENDS

International financial transmission: emerging and mature markets. Felices, Guillermo; Grisse, Christian; Yang, Jing (2009). Bank
of England, 2009. - 43 pages. [RKN: 69967]
With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affect
financial markets worldwide. The aim of this paper is to quantify the co-movements between bond markets in the US and emerging
market economies using daily data from prior to the East Asian crisis through to the early stages of the current global financial
crisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We find
that shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the short
run (consistent with flight to quality' effects), while shocks that increase US interest rates raise EMBIG spreads over longer
horizons (consistent with financing cost' or search for yield' effects). We also find that shocks that increase EMBIG spreads tend
to widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emerging
16

market economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates can
explain around 60%-70% of the variation of EMBIG and US high-yield spreads.
http://www.bankofengland.co.uk/publications/workingpapers/index.htm

MATHEMATICAL MODELS


MODELLING



MONETARY ECONOMICS

Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation. S, Filipa; Towbin,
Pascal; Wieladek, Tomasz (2011). - London: Bank of England, 2011. - 42 pages. [RKN: 73716]
A number of OECD countries experienced an environment of low interest rates and a rapid increase in
housing market activity during the last decade. Previous work suggests three potential explanations for
these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive
financial innovation combined with inappropriately lax financial regulation. In this study we examine
the effects of these three factors on the housing market. We estimate a panel VAR for a sample of
OECD countries and identify monetary policy and capital inflows shocks using sign restrictions.
To explore how these effects change with the structure of the mortgage market and the degree of
securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics.
Our results suggest that both types of shocks have a significant and positive effect on real house prices,
real credit to the private sector and real residential investment. The responses of housing variables to
both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling
the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is
particularly strong for capital inflows shocks, increasing the response of real house prices, residential
investment and real credit by a factor of two, three and five, respectively.
17

MORTGAGE INDEMNITY INSURANCE


MORTGAGES


MUTUAL FUNDS

39004]

OPTION PRICING


18

PENSION REFORM

(2010). 2010. - 24 pages. [RKN: 72696]

PENSIONS

future.

[RKN: 74905]
Shelved at: JOU


19

PORTFOLIO INVESTMENT


PORTFOLIO MANAGEMENT

introducing them.


PORTFOLIO PERFORMANCE

Information spillovers between size and value premium in average stock returns. Anheluk, Tobias E; Simlai, Pradosh Palgrave
In this article, we investigate the nature of information transmission mechanism between portfolio of stocks sorted by market
capitalization and book-to-market equity. Our empirical evidence supports the fact that there is indeed an economically meaningful
spillover effect but the direction is asymmetric. Our results demonstrate small but significant volatility spillover from the portfolio of
growth stocks to the portfolio of small stocks, and from the large market capitalization stocks to the portfolio of value stocks. The
evidence also indicates some information spillover effect at the mean level for the smaller size and value portfolios. The
implication is particularly important for determining the cost of capital, and for assessing portfolio diversification strategies of
investment managers.

20

PRICE COMPETITION


PRICING

An analysis of stock market volatility. Adams, Andrew; Armitage, Seth; Fitzgerald, Adrian Faculty of Actuaries and Institute of
Actuaries; Cambridge University Press, [RKN: 45565]
Shelved at: Per: AAS (Oxf) Per: AAS (Lon)
Annals of Actuarial Science (2012) 6(1) : 153-170.
This paper provides a user-friendly approach to explain how variation in fundamental price-determining variables translates into
variation in the fundamental value of equities, based on the standard dividend-growth model. The analysis is illustrated with UK
data using estimates of real interest rate forecasts and real dividend growth rate forecasts in the past. An important application of
this approach is that stock market volatility can be analysed in terms of its component parts. Actual market volatility does not
appear to be excessive when compared with the notional volatility implied by changes over time in our estimates of forecast real
interest rates and forecast real dividend growth rates.
http://www.actuaries.org.uk/research-and-resources/pages/access-journals http://www.openathens.net



Manipulating the shorts. Clunie, James; Moles, Peter; Terekhova, Nelly (2009). - Edinburgh: University of Edinburgh, School of
Management, 2009. - 55 pages. [RKN: 70032]
Online only. Download as PDF.
We identify patterns in market data that are consistent with manipulative short squeezes. These follow a general pattern of pump,
squeeze and dump, whereby manipulators pump up the stock price, short-sellers are squeezed out of their positions and
manipulators dump shares at the now elevated stock price. We find that apparent manipulative short squeezes are rare events.
However, where they do occur, short-sellers lose money. We observe statistically significant abnormal returns around these
events that are also economically significant with an average cumulative stock return of 3.45% in the pump phase and 2.26%
during the squeeze phase. These are followed by a price reversal, but short-sellers who have covered their positions do not
benefit from this effect. Market data such as volatility of stock returns, trading volume, liquidity and stock loan utilization rates might
be expected to assist in anticipating manipulative short squeezes. However, it is difficult to forecast manipulative short squeezes
from this data alone.
http://webdb.ucs.ed.ac.uk/management/msm/research/centres/centre papers.cfm?rescentre=1

PRIVATE MEDICAL INSURANCE

The market potential for privately financed long term care products in the UK. Mayhew, Leslie (2009). - London: City University
School of Mathematics, 2009. - 37 pages. [RKN: 69926]
This paper considers the market potential for privately financed long term care products in the UK. It finds that since the present
market is undeveloped there is scope to increase the range of products available to suit people with different means and
circumstances. Currently the UK spends about 19 billion on long term care (LTC) of which around a third is privately funded and
two thirds publicly funded. The cost of informal care for older people is estimated to be worth 58 billion a year making a total of
77 billion. The paper finds that very few people can afford to pay for LTC out of their own pockets from income alone, but that this
number is increased if savings are taken into account and significantly increased if housing wealth is included as well. Insurance
for LTC is normally considered to be part of the product mix usually associated with the private funding of LTC. However, as the
US market demonstrates, LTC insurance products can be complex and difficult to understand and yet still not meet all needs,
whilst US research suggests that policies are also over priced and unaffordable for many. In this paper the case is made for other
kinds of products which produce an income at the point of need and therefore make a contribution towards LTC costs. These
products include equity release, top up insurance, disability linked annuities, and immediate needs annuities. Although they may
not cover all possible risks, and therefore all needs, they would bring much needed new money into LTC as well as lead to an
increase in personal responsibility. With large numbers of older people on very low incomes not everybody would be able to afford
these products and so the concept of LTC bonds is considered. These would work like premium bonds and pay prizes but would
21

only be cashable at the point of need. Taken together all of the products considered would extend choice and there would be
something to meet most circumstances. The governments role would be five fold: (1) to facilitate the introduction of the LTC
products and provide regulation; (2) to provide appropriate incentives for people to take them up; (3) to clarify the role of the state
in terms of the minimum entitlement people can expect; (4) to make it easier to get advice and direction at points of initial contact,
for example with social and health care services; and (5) to cover risks that the market cannot handle.
http://www.cass.city.ac.uk/ data/assets/pdf file/0008/37178/188ARP.pdf

RATING

Sharon [RKN: 39618]

REFORM

methods.

REGULATION

45848]

22




Profiting from a contrarian application of technical trading rules in the US stock market. Balsara, Nauzer; Chen, Jason; Zheng, Lin
[RKN: 39222]
The variance ratio test suggests that we cannot reject the random walk null hypothesis for three major US stock market indexes
between 1990 and 2007. Moreover, we find that the nave forecasting model based on the random walk assumption frequently
generates more accurate forecasts than those generated by the autoregressive integrated moving average forecasting model.
Consistent with this finding, we find that the regular application of three commonly used technical trading rules (the moving
average crossover rule, the channel breakout rule and the Bollinger band breakout rule) underperform the buy-and-hold strategy
between 1990 and 2007. However, we observe significant positive returns on trades generated by the contrarian version of these
three technical trading rules, even after considering a 0.5 per cent transaction costs on all trades.


State involvement in insurance markets. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 32
pages. [RKN: 74774]
Shelved at: JOU
Sigma (2011) 3
More and more governments are leveraging private insurance skills and the growing capacity of the sector to cover catastrophe
losses as well as a wide range of other risks, Swiss Re reveals in its latest sigma research publication. The Japanese earthquake
tragedy earlier this year caused more than USD 200 billion in total property losses, but only USD 30 billion was covered by private
insurance. In contrast, private insurers will pay about USD 9 billion of the USD 12 billion in total property losses from the recent
Christchurch, New Zealand earthquake.
http://www.swissre.com

23

RETURNS

71585]
and stock returns.


RISK



45848]

Sharon [RKN: 39618]

Labor Market Uncertainty and Pension System Performance. Mitchell, Olivia S; Turner, John A (2009). Pension Research Council,
2009. - 34 pages. [RKN: 72007]
The financial market crisis has prompted policymakers to devote substantial attention to ways in which capital market risks shape
pension performance, but few analysts have asked how shocks to human capital shape retirement wellbeing. Yet human capital
risks due to fluctuations in labor earnings, employment volatility, and survival, can have a profound influence on pension
accumulations and payouts. This paper reviews existing studies and offers a framework to think about how human capital risk can
24

influence pension outcomes. We conclude with thoughts on how future analysts can better assess sensitivity of pension plan
outcomes to a labour income uncertainty.



Panic: the story of modern financial insanity. Lewis, Michael (2009). - New York: W. W. Norton & Company, 2009. - 391 pages.
[RKN: 38665]
Shelved at: EA (Lon)
Review: RKN 39106
The author has chosen more than fifty pieces of brilliant journalism to illuminate the most violent and costly upheavals in recent
financial history to be included in this book. Some paint the mood and market factors leading up to the particular crash, or show
what people thought was happening at the time. Others analyze what actually happened.

The predictive power of value-at-risk models in commodity future markets. Fuss, Roland; Adams, Zeno; Kaiser, Dieter G Palgrave
Applying standard value-at-risk (VaR) models to assets wihn non-normally distributed returns can lead to an understimation of the
true risk. Commodity futures returns are driven by continuous supply and demand shocks that lead to a distinct pattern of
time-varying volatility. As a result of these specific risk characteristics, commodity returns create the ideal environment for testing
the accuracy of VaR models. Therefor, this article examines the in- and out-of-sample performance of various VaR approaches for
commodity futures investments. Our results suggest that dynamic VaR models such as the CAViaR and the GARCH-type VaR
generally outperform traditional VaRs. These models can adequately incorporate the time-varying volatility of commodity returns,
and are sensitive to significant changes in the series of commodity returns. This has important implications for the risk
management of portfolios involving commodity futures positions. Risk managers willing to familiarize themselves with these
complex models are rewarded with a VaR that shows the adequate level of risk even under extreme and rapidly changing market
conditions, as well as under calm market periods, dueing which excessive capital reserves would lead to unneccessary
opportunity costs.


RISK AVERSION


25

RISK CHARACTERISTICS

Information spillovers between size and value premium in average stock returns. Anheluk, Tobias E; Simlai, Pradosh Palgrave
In this article, we investigate the nature of information transmission mechanism between portfolio of stocks sorted by market
capitalization and book-to-market equity. Our empirical evidence supports the fact that there is indeed an economically meaningful
spillover effect but the direction is asymmetric. Our results demonstrate small but significant volatility spillover from the portfolio of
growth stocks to the portfolio of small stocks, and from the large market capitalization stocks to the portfolio of value stocks. The
evidence also indicates some information spillover effect at the mean level for the smaller size and value portfolios. The
implication is particularly important for determining the cost of capital, and for assessing portfolio diversification strategies of
investment managers.

SAVING

[RKN: 74905]
Shelved at: JOU


SOCIAL INSURANCE

(2010). 2010. - 24 pages. [RKN: 72696]

SOCIAL POLICY

26

methods.

STANDARDS AND SPECIFICATIONS


STOCHASTIC PROCESSES





STOCK CONTROL

39004]
27


STOCK MARKET


[RKN: 45094]



Excess volatility re-visited. Armitage, Seth; Fitzgerald, Adrian; Adams, Andrew (2009). - Edinburgh: University of Edinburgh, School
of Management, 2009. - 33 pages. [RKN: 70030]
We show that there is a broad range of values for UK stock market volatility that can be justified by reasonable forecasts of interest
rates and dividend growth, without any change in the equity risk premium. Actual volatility is well within this range so no recourse
to irrational investor behaviour is required to explain UK stock market volatility.
Keywords: Excess volatility; equity risk premium; rational valuation

28


Manipulating the shorts. Clunie, James; Moles, Peter; Terekhova, Nelly (2009). - Edinburgh: University of Edinburgh, School of
Management, 2009. - 55 pages. [RKN: 70032]
We identify patterns in market data that are consistent with manipulative short squeezes. These follow a general pattern of pump,
squeeze and dump, whereby manipulators pump up the stock price, short-sellers are squeezed out of their positions and
manipulators dump shares at the now elevated stock price. We find that apparent manipulative short squeezes are rare events.
However, where they do occur, short-sellers lose money. We observe statistically significant abnormal returns around these
events that are also economically significant with an average cumulative stock return of 3.45% in the pump phase and 2.26%
during the squeeze phase. These are followed by a price reversal, but short-sellers who have covered their positions do not
benefit from this effect. Market data such as volatility of stock returns, trading volume, liquidity and stock loan utilization rates might
be expected to assist in anticipating manipulative short squeezes. However, it is difficult to forecast manipulative short squeezes
from this data alone.

[RKN: 39222]



SYSTEMIC RISK

29


Systemic risk, multiple equilibriums, and market dynamics: What you need to know and why. El-Erian, Mohamed A; Spence,
Michael (2012). 2012. [RKN: 45857]
Using an array of real-life examplesincluding the current sovereign debt crisis in the eurozonethe authors analyze the
underlying dynamics of the periodic bouts of systemic path dependence that affect not only financial markets (their functioning and
stability, investment returns, and volatility) but also investment strategy itself. Their analysis explains how sudden shifts in
expectations can morph into particularly disruptive multiple-equilibrium dynamics and points to possible implications for market
outcomes, market equilibriums, and policy responses.

UNEMPLOYMENT

Labour market institutions and unemployment volatility: evidence from OECD countries. Faccini, Renato; Bondibene, Chiara
Rosazza (2012). - London: Bank of England, 2012. - 45 pages. [RKN: 70093]
Using publicly available data for a group of 20 OECD countries, we find that the cyclical volatility of the unemployment rate exhibits
substantial cross-country and time variation. We then investigate empirically whether labour market institutions can account for
this observed heterogeneity and find that the impact of various institutions on cyclical unemployment dynamics is quantitatively
strong and statistically significant. The hypothesis that labour market institutions could increase the volatility of unemployment by
reducing match surplus is not supported by the data. In fact, unemployment benefits, taxation and employment protection appear
to reduce the volatility of unemployment rates. In addition, we find that the precise nature of union bargaining has important
implications for cyclical unemployment dynamics, with union coverage and density having large and offsetting effects. Finally, we
provide evidence suggesting that interactions between shocks and institutions matter for cyclical unemployment fluctuations.
However, institutions only account for about one quarter of the explained variation, which implies that they are important but they
are not the entire story.

UNITED STATES

71585]
and stock returns.


Sharon [RKN: 39618]
30


[RKN: 39222]


VALUATION

Market consistency. Model calibration in imperfect markets. Kemp, Malcolm H D (2009). - Chichester: Wiley, 2009. - xxv,350
pages. [RKN: 39382]
Shelved at: CPFB (Lon) Shelved at: 332.041 KEM
Achieving market consistency can be challenging, even for the most established finance practitioners. In "Market Consistency:
Model Calibration in Imperfect Markets", leading expert Malcolm Kemp shows readers how they can best incorporate market
consistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the book
explores how risk management and related disciplines might develop as fair valuation principles become more entrenched in
finance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio construction
models to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used,
what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains why
market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging
parameters, and provides solutions to even the most complex problems.

The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvency
and other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthiness
of governments is no longer undoubted; and, it explores when practitioners should focus most on market consistency and when
their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulation
and risk management within different parts of the financial services industry, identifying how and why market consistency is key to
these topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds may
not be the same as for other financial market participants such as banks and asset managers

VALUE-AT-RISK (VAR)

45848]

31


The predictive power of value-at-risk models in commodity future markets. Fuss, Roland; Adams, Zeno; Kaiser, Dieter G Palgrave
Applying standard value-at-risk (VaR) models to assets wihn non-normally distributed returns can lead to an understimation of the
true risk. Commodity futures returns are driven by continuous supply and demand shocks that lead to a distinct pattern of
time-varying volatility. As a result of these specific risk characteristics, commodity returns create the ideal environment for testing
the accuracy of VaR models. Therefor, this article examines the in- and out-of-sample performance of various VaR approaches for
commodity futures investments. Our results suggest that dynamic VaR models such as the CAViaR and the GARCH-type VaR
generally outperform traditional VaRs. These models can adequately incorporate the time-varying volatility of commodity returns,
and are sensitive to significant changes in the series of commodity returns. This has important implications for the risk
management of portfolios involving commodity futures positions. Risk managers willing to familiarize themselves with these
complex models are rewarded with a VaR that shows the adequate level of risk even under extreme and rapidly changing market
conditions, as well as under calm market periods, dueing which excessive capital reserves would lead to unneccessary
opportunity costs.

VOLATILITY


[RKN: 45094]



71585]
32

and stock returns.



Excess volatility re-visited. Armitage, Seth; Fitzgerald, Adrian; Adams, Andrew (2009). - Edinburgh: University of Edinburgh, School
of Management, 2009. - 33 pages. [RKN: 70030]
We show that there is a broad range of values for UK stock market volatility that can be justified by reasonable forecasts of interest
rates and dividend growth, without any change in the equity risk premium. Actual volatility is well within this range so no recourse
to irrational investor behaviour is required to explain UK stock market volatility.
Keywords: Excess volatility; equity risk premium; rational valuation


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