Economics - Research Publications
Now showing items 1-12 of 545
Optimal periodic dividend strategies for spectrally positive Lévy risk processes with fixed transaction costs
(Elsevier BV, 2020-06)
We consider the general class of spectrally positive Lévy risk processes, which are appropriate for businesses with continuous expenses and lump sum gains whose timing and sizes are stochastic. Motivated by the fact that dividends cannot be paid at any time in real life, we study periodic dividend strategies whereby dividend decisions are made according to a separate arrival process. In this paper, we investigate the impact of fixed transaction costs on the optimal periodic dividend strategy, and show that a periodic strategy is optimal when decision times arrive according to an independent Poisson process. Such a strategy leads to lump sum dividends that bring the surplus back to as long as it is no less than at a dividend decision time. The expected present value of dividends (net of transaction costs) is provided explicitly with the help of scale functions. Results are illustrated.
Cream skimming: Theory and evidence from hospital transfers and capacity utilization
The paper examines cream skimming behaviour by studying hospital transfers in a mixed public-private hospital system. A key innovation is the use of capacity utilization to identify cream skimming. We develop a dynamic model with uncertain patient arrivals and hospital capacity constraints to clarify the conditions under which a profit maximizing hospital will engage in patient selection by transferring ‘hard’ patients—those with severe/complex conditions—to free up capacity to accommodate ‘easy’ patients with few severe/complex conditions. Given finite capacity, public hospitals are strictly less likely to transfer patients than profit-motivated private hospitals at the same level of capacity. We test implications of the model using hospital administrative data from Victoria, Australia, and find empirical support for the cream skimming predictions of the model.
A multivariate evolutionary generalised linear model framework with adaptive estimation for claims reserving
In this paper, we develop a multivariate evolutionary generalised linear model (GLM) framework for claims reserving, which allows for dynamic features of claims activity in conjunction with dependency across business lines to accurately assess claims reserves. We extend the traditional GLM reserving framework on two fronts: GLM ﬁxed factors are allowed to evolve in a recursive manner, and dependence is incorporated in the speciﬁcation of these factors using a common shock approach. We consider factors that evolve across accident years in conjunction with factors that evolve across cal-endar years. This two-dimensional evolution of factors is unconventional as a traditional evolutionary model typically considers the evolution in one single time dimension. This creates challenges for the estimation process, which we tackle in this paper. We develop the formulation of a particle ﬁltering algorithm with parameter learning procedure. This is an adaptive estimation approach which updates evolving factors of the framework recursively over time. We implement and illustrate our model with a simulated data set, as well as a set of real data from a Canadian insurer.
LESS-EXPENSIVE VALUATION AND RESERVING OF LONG-DATED VARIABLE ANNUITIES WHEN INTEREST RATES AND MORTALITY RATES ARE STOCHASTIC
(Cambridge University Press (CUP), 2020)
Variable annuities are products offered by pension funds and life offices that provide periodic future payments to the investor and often have ancillary benefits that guarantee survival benefits or sums insured on death. This paper extends the benchmark approach to value and hedge long-dated variable annuities using a combination of cash, bonds and equities under a variety of market models, allowing for dependence between financial and insurance markets. Under a simplified case of independence, the results show that when the discounted index is modelled as a time-transformed squared Bessel process, less-expensive valuation and reserving is achieved regardless of the short rate model or the mortality model.
On the Distribution of the Excedents of Funds with Assets and Liabilities in Presence of Solvency and Recovery Requirements
(Cambridge University Press (CUP), 2018-05-01)
We consider a profitable, risky setting with two separate, correlated asset and liability processes (first introduced by Gerber and Shiu, 2003). The company that is considered is allowed to distribute excess profits (traditionally referred to as dividends in the literature), but is regulated and is subject to particular regulatory (solvency) constraints. Because of the bivariate nature of the surplus formulation, such distributions of excess profits can take two alternative forms. These can originate from a reduction of assets (and hence a payment to owners), but also from an increase of liabilities (when these represent the wealth of owners, such as in pension funds). The latter is particularly relevant if distributions of assets do not make sense because of the context, such as in regulated pension funds where assets are locked until retirement. In this paper, we extend the model of Gerber and Shiu (2003) and consider recovery requirements for the distribution of excess funds. Such recovery requirements are an extension of the plain vanilla solvency constraints considered in Paulsen (2003), and require funds to reach a higher level of funding than the solvency level (if and after it is triggered) before excess funds can be distributed again. We obtain closed-form expressions for the expected present value of distributions (asset decrements or liability increments) when a distribution barrier is used.
Optimal dividends under Erlang(2) inter-dividend decision times
In the classical dividends problem, dividend decisions are allowed to be made at any time. Under such a framework, the optimal dividend strategies are often of barrier or threshold type, which can lead to very irregular dividend payments over time. In practice however companies distribute dividends on a periodic basis. In that spirit, “Erlangisation” techniques have been used to approximate problems with fixed inter-dividend decision times. When studying the optimality of such strategies, the existing literature focuses exclusively on the special case of exponential – that is, Erlang(1) – inter-dividend decision times. Higher dimensional models are surprisingly difficult to study due to the implicit nature of some of the equations. While some of this difficulty continues to exist in high dimensions, in this paper we provide a stepping stone to the general Erlang() problem by providing a detailed analysis of the optimality of periodic barrier strategies when inter-dividend-decision times are Erlang(2) distributed. Results are illustrated.
COMMON SHOCK MODELS FOR CLAIM ARRAYS
(Cambridge University Press (CUP), 2018-09-01)
The paper is concerned with multiple claim arrays. In recognition of the extensive use by practitioners of large correlation matrices for the estimation of diversification benefits in capital modelling, we develop a methodology for the construction of such correlation structures (to any dimension). Indeed, the literature does not document any methodology by which practitioners, who often parameterise those correlations by means of informed guesswork, may do so in a disciplined and parsimonious manner. We construct a broad and flexible family of models, where dependency is induced by common shock components. Models incorporate dependencies between observations both within arrays and between arrays. Arrays are of general shape (possibly with holes), but include the usual cases of claim triangles and trapezia that appear in the literature. General forms of dependency are considered with cell-, row-, column-, diagonal-wise, and other forms of dependency as special cases. Substantial effort is applied to practical interpretation of such matrices generated by the models constructed here. Reasonably realistic examples are examined, in which an expression is obtained for the general entry in the correlation matrix in terms of a limited set of parameters, each of which has a straightforward intuitive meaning to the practitioner. This will maximise chance of obtaining a reliable matrix. This construction is illustrated by a numerical example.
On optimal joint reflective and refractive dividend strategies in spectrally positive Levy models
The expected present value of dividends is one of the classical stability criteria in actuarial risk theory. In this context, numerous papers considered threshold (refractive) and barrier (reflective) dividend strategies. These were shown to be optimal in a number of different contexts for bounded and unbounded payout rates, respectively. In this paper, motivated by the behavior of some dividend paying stock exchange companies, we determine the optimal dividend strategy when both continuous (refractive) and lump sum (reflective) dividends can be paid at any time, and if they are subject to different transaction rates. We consider the general family of spectrally positive Lévy processes. Using scale functions, we obtain explicit formulas for the expected present value of dividends until ruin, with a penalty at ruin. We develop a verification lemma, and show that a two-layer strategy is optimal. Such a strategy pays continuous dividends when the surplus exceeds level , and all of the excess over as lump sum dividend payments. Results are illustrated.
Should We Tax Sugar and If So How?
This article reviews empirical studies of proposals to tax sugary products in Australia. A corrective tax must be designed carefully if it is to increase national welfare. There is an underlying problem in designing such a tax because consumers are heterogeneous. The best choice of goods to be taxed is the group of sugar-sweetened-beverages, the best tax base is the sugar content and the best tax form is a progressive specific tax with two or more levels. We recommend initial rates that are equal to those of the UK tax on SSBs.
John Maynard Keynes, Joan Robinson and the prospect theory approach to money wage determination
In the 1930s, John Maynard Keynes and Joan Robinson observed a flex–fix sequence of money wage adjustment, which is changes in aggregate demand may initially change money wages but then money wages will settle at new levels even if unemployment is high. Their discussion of this pattern alluded to the importance of loss aversion in wage setting. This paper shows how loss aversion in wage setting can explain the flex–fix sequence of money wage behaviour in a way which is consistent with the observations and ideas of Keynes and Robinson.
Endowments, Exclusion, and Exchange
(Econometric Society, 2019)
We propose a new solution for discrete exchange economies and resource‐allocation problems, the exclusion core. The exclusion core rests upon a foundational idea in the legal understanding of property, the right to exclude others. By reinterpreting endowments as a distribution of exclusion rights, rather than as bundles of goods, our analysis extends to economies with qualified property rights, joint ownership, and social hierarchies. The exclusion core is characterized by a generalized top trading cycle algorithm in a large class of economies, including those featuring private, public, and mixed ownership. It is neither weaker nor stronger than the strong core.
Short trading cycles: Paired kidney exchange with strict ordinal preferences
(Elsevier BV, 2020-03-01)
I study kidney exchange with strict ordinal preferences and with constraints on the lengths of the exchange cycles. Efficient deterministic mechanisms have poor fairness properties in this environment. Instead, I propose an individually rational, ordinally efficient and anonymous random mechanism for two-way kidney exchange based on Bogomolnaia and Moulin’s (2001) Probabilistic Serial mechanism. Individual rationality incentivizes patient-donor pairs who are compatible with each other to participate in the exchange, thus increasing the overall transplantation rate. Finally, individual rationality, ex-post efficiency and weak strategyproofness are incompatible for any mechanism.