proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

lp modeling for asset liability management a survey of choices and simplifications dynamic linear programming lp models for asset liability management alm are quite powerful and flexible but face two challenges 1 many modeling choices not all consistent with one another or with finance theory and 2 solution difficulties due to the large number of scenarios obtained from standard interest rate models we first survey these modeling choices with a view to help researchers make self consistent choices next we review how the dynamic lp model for alm and the representation of uncertainty therein have been simplified in the past to motivate new or hybrid models emphasizing tractability to this end we review existing static lp models as extreme modeling simplifications and aggregation as a simplification of uncertainty

the impact of the us sales tax rate on city size and economic activity a cge approach this paper analyses the effects of the change in the us sales tax on economic activity and city size using a computable general equilibrium cge model previous works have been designed to isolate

the economic consequences of productivity changes a computable general equilibrium cge analysis cutler h and davies s the economic consequences of productivity changes a computable general equilibrium cge analysis regional studies this paper uses a data intensive cge model to examine sector specific impacts of increases in total factor productivity and labour and capital productivity it focuses on the importance of a sector s output in household consumption and firms intermediate input demand the importance of labour and capital in value added and the impact on the city s consumer price index cpi as factors influencing the transmission mechanism the general equilibrium effects result in unambiguous increases in household migration for total factor productivity and capital productivity but not for the labour case this analysis emphasizes the impact on household income and tax revenue per new household cutler h et davies s les consequences economiques des changements de productivite une analyse egc regional studies cet article utilise un modele d equilibre general calculable egc

fair demographic risk sharing in defined contribution pension systems in this article we formulate and solve the optimal design problem of a defined contribution public pension fund in a highly stylized but still rather general non stationary framework we adopt the viewpoint of a benevolent social planner who aims at treating in a fair manner the successive overlapping generations participating to such a long term mandatory system using the approach of el karoui and jeanblanc 1998 for the optimal consumption and portfolio choice problem with random income in a complete market we exhibit a solution to our intertemporal stochastic control problem where each generation receives a fair lumpsum retirement benefit it is proportional to the contributions she has paid during her active worklife and follows a fixed common rule although her pension value itself may depend on variables only observable at her retirement time we next relax the assumption that the collective pension system is mandatory and investigate the performance of individual investment plans in the market comparing the outcomes of both alternatives we derive a condition under which the collective fund can be expected to overperform the individual plan in the special case of a stationary economy such a possibility has been pointed out by gollier 2008 in fact this effect results from the possibility for the collective fund to borrow today against contributions of future generations which allows to implement riskier strategies and may improve its performance

continuous time mean variance asset allocation a time consistent strategy abstract we develop a numerical scheme for determining the optimal asset allocation strategy for time consistent continuous time mean variance optimization any type of constraint can be applied to the investment policy the optimal policies for time consistent and pre commitment strategies are compared when realistic constraints are applied the efficient frontiers for the pre commitment and time consistent strategies are similar but the optimal investment strategies are quite different

portfolio choice with puts evidence from variable annuities this study investigated the asset allocation behavior of individuals who select an out of the money long dated longevity put option on their investment funds the asset allocations of these people within their variable annuity subaccounts are 5 30 percent more risky than the allocations of those who do not choose this protection investors who do not choose the longevity put option follow the classic life cycle age phased reduction in equity a rudimentary model of utility maximizing behavior is suggested that justifies the increased allocation to risk as long as the investor understands the payoff structure of the longevity put and is willing and able to exercise the annuity option if and when it matures in the money

dynamic asset allocation when bequests are luxury goods abstract luxury bequests impart systematic effects of age to an investor s optimal allocation the expected percentage allocation to equities rises throughout retirement when bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption this is essentially lower risk aversion as a retiree approaches death her expected remaining lifetime utility is increasingly composed of bequest utility and thus generates progressively lower risk aversion a retiree responds by increasingly favoring the higher return risky asset compared to standard preferences luxury bequests elevate a retiree s average exposure to the risky asset but the difference is small in early retirement

or practice assisting defined benefit pension plans the defined benefit pension system poses substantial long term risks for the u s economy we describe a flexible asset liability management alm system for pension planning the primary goals are to improve the performance and survivability of the pension trust we first employ a stochastic program for enhancing investment strategies in light of company and other goals and pension risk constraints the results are linked with a policy simulator for further analysis we illustrate the concepts via two disparate real world companies the first is a slowly growing auto company and the second a profitable pharmaceutical enterprise we show that a stochastic program can help in the process of discovering sound policy rules the alm system has been employed extensively throughout the world by a large global actuarial firm

stochastic lifestyling optimal dynamic asset allocation for defined contribution pension plans this paper considers the asset allocation strategies open to members of deflnedcontribution pension plans we investigate a model that incorporates three sources of risk asset risk and salary or labour income risk in the accumulation phase and interest rate risk at the point of retirement we propose a new form of terminal utility function incorporating habit formation that uses the plan member s flnal salary as a numeraire the paper discusses various properties and characteristics of the optimal stochastic asset allocation strategy which we call stochastic lifestyling both with and without the presence of non hedgeable salary risk we compare the performance of stochastic lifestlying with some popular strategies used by pension providers including deterministic lifestyling which involves a gradual switch from equities to bonds according to preset rules and static strategies that invest in benchmark mixed funds we flnd that the use of stochastic lifestyling signiflcantly enhances the welfare of a wide range of potential plan members relative to these other strategies jel classiflcation e21 g11 g23

the arbitrage principle in financial economics abstract the importance of arbitrage conditions in financial economics has been recognized since modigliani and miller s classic work on the financial structure of the firm they showed that if a f

default estimation correlated defaults and expert information abstractcapital allocation decisions are made on the basis of an assessment of creditwor thiness default is a rare event for most segments of a bank s portfolio and datainformation can be minimal inference about default rates is essential for e cientcapital allocation for risk management and for compliance with the requirementsof the basel ii rules on capital standards for banks expert information is crucialin inference about defaults a bayesian approach is proposed and illustrated usingprior distributions assessed from industry experts a maximum entropy approach isused to represent expert information the binomial model most common in appli cations is extended to allow correlated defaults yet remain consistent with basel ii the application shows that probabilistic information can be elicited from expertsand econometric methods can be useful even when data information is sparse keywords bayesian inference basel ii risk management prior elicitation small probability estimation

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

lifetime investment and consumption using a defined contribution pension scheme during the accumulation phase of a defined contribution pension scheme a scheme member invests part of their stochastic income in a portfolio of a stock and a bond in order to build up sufficient funds for retirement it is assumed that the remainder of their salary pre retirement is consumed an annuity is purchased at retirement and the stock allocation and consumption pre retirement maximise the total expected lifetime consumption using a cara utility function perfect correlation between the scheme member s income and the stock price leads to analytical expressions for the controls for a general income model if the correlation is imperfect then analytical controls are found for two particular stochastic income models

life cycle asset allocation with annuity markets abstract this paper derives the optimal consumption and portfolio choice pattern over the life cycle for households facing uninsurable labor income risk ruin risk stochastic capital markets and uncertain lifetime our model posits a dynamic utility maximizer with crra and epstein zin preferences who has access to liquid stocks bonds and illiquid life annuities we show that a considerable fraction of wealth is gradually annuitized until retirement and beyond to skim the mortality credit the remaining liquid wealth is mainly invested in stocks to compensate for riskless investment in life annuities the model allows us to assess the economic importance of common explanations for the empirically low annuity demand by analyzing participations rates annuitization fractions and welfare effects

valuation of mortgage interest deductibility under uncertainty an option pricing approach abstract we propose a dynamic option pricing model to quantify the tax shield value of us mortgage interest deduction mid under uncertainty we identify non linear forms both convex and concave regions in the pay off of mid and discuss the implications for the valuation of mid the model provides insights regarding the relationship between the effective mid and a set of underlying variables including income level house price mortgage size and state and local tax rates we also show how the tax shield value of mortgage loans changes with the volatility of underlying processes we apply the model to the case of the optimal choice of adjustable versus fixed rate mortgages and prove that under a mean preserving interest rate an adjustable mortgage always offers a bigger tax saving we use the framework to study how the tax reforms of 2017 have affected the mid benefits of different households and find that no household is expected to receive a larger mortgage deduction under the new law finally we find that by putting a cap on deductible state and local taxes the 2017 reform has significantly reduced the quantitative impact of income and house price volatility on the expected mid value

valuation optimal asset allocation and retirement incentives of pension plans we provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula in turn we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations our model provides an explicit valuation formula for a stylized defined benefits plan the optimal asset allocation policies consist of the replicating portfolio of the pension liabilities and the growth optimum portfolio independent of the pension liabilities we show that the worker will retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

default probability estimation via pair copula constructions abstract in this paper we present a novel approach for firm default probability estimation the methodology is based on multivariate contingent claim analysis and pair copula constructions for each considered firm balance sheet data are used to assess the asset value and to compute its default probability the asset pricing function is expressed via a pair copula construction and it is approximated via monte carlo simulations the methodology is illustrated through an application to the analysis of both operative and defaulted firms

hedging in incomplete markets with hara utility in the context of merton s original problem of optimal consumption and portfolio choice in continuous time this paper solves an extension in which the investor is endowed with a stochastic income that cannot be replicated by trading the available securities the problem is treated by demonstrating using analytic and in particular viscosity solutions techniques that the value function of the stochastic control problem is a smooth solution of the associated hamilton jacobi bellman hjb equation the optimal policy is shown to exist and given in a feedback form from the optimality conditions in the hjb equation at zero wealth a fixed fraction of income is consumed for large wealth the original merton policy is approached we also give a sufficient condition for wealth under the optimal policy to remain strictly positive

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

optimal savings management for individuals with defined contribution pension plans abstract the paper provides some guidelines to individuals with defined contribution dc pension plans on how to manage pension savings both before and after retirement we argue that decisions regarding investment annuity payments and the size of death sum should not only depend on the individual s age or time left to retirement nor should they solely depend on the risk preferences but should also capture 1 economical characteristics such as current value on the pension savings account expected pension contributions mandatory and voluntary and expected income after retirement e g retirement state pension and 2 personal characteristics such as risk aversion lifetime expectancy preferable payout profile bequest motive and preferences on portfolio composition specifically the decisions are optimal under the expected crra utility function and are subject to the constraints characterizing the individual the problem is solved via a model that combines two optimization approaches stochastic optimal control and multi stage stochastic programming the first method is common in financial and actuarial literature but produces theoretical results however the latter which is characteristic for operations research has practical applications we present the operations research methods which have potential to stimulate new thinking and add to actuarial practice

simple explicit formula for near optimal stochastic lifestyling abstract in life cycle economics the samuelson paradigm samuelson 1969 states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income it is well known that in the presence of credit constraints this paradigm no longer applies instead optimal life cycle investment gives rise to so called stochastic lifestyling cairns blake and dowd 2006 whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases in stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time while the existing literature relies on complex numerical algorithms to quantify optimal lifestyling the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy

theory of constant proportion portfolio insurance abstract we study constant proportion portfolio insurance cppi a dynamic strategy that maintains the portfolio s risk exposure a constant multiple of the excess of wealth over a floor up to a borrowing limit we use this simple rule to investigate how transaction costs and borrowing constraints affect portfolio insurance type strategies absent transaction costs cppi is equivalent to investing in perpetual american call options and is optimal for a piecewise hara utility function with a minimum consumption constraint as the multiple increases the payoffs under cppi approach those of a stop loss strategy the expected holding period return is not monotonic in the multiple and a higher expected return can be obtained under cppi than with a stop loss strategy

general equilibrium effects of local taxes abstract this paper analyzes the consequences of the property tax and a local sales tax in the context of a spatial general equilibrium model of a closed city with a generalized utility function of the residents and production function of housing the range of effects are different from those obtained earlier by other authors who have generally assumed particular functional forms for example it appears that under certain conditions the property tax can even lead to an increase in metropolitan size alternatively a local sales tax can lead either to an expansion or contraction in city size results obtained are used to analyze the consequences of different types of local tax reforms

default estimation and expert information default is a rare event even in segments in the midrange of a bank s portfolio inference about default rates is essential for risk management and for compliance with the requirements of basel ii most commercial loans are in the middle risk categories and are to unrated companies expert information is crucial in inference about defaults a bayesian approach is proposed and illustrated using a prior distribution assessed from an industry expert the binomial model most common in applications is extended to allow correlated defaults a check of robustness is illustrated with an e mixture of priors

land use regulations and regional economic development this paper uses a data intensive computable general equilibrium cge model of a medium sized city with integrated commercial and residential land data to analyze changes to local land use regulations via changes in land supply elasticities on economic development measures employment household income housing prices and tax revenue under various types of regional growth that originate from different local sectors the cge framework overcomes difficulties of econometric modeling in this area namely measurement consistency impact isolation and endogeneity issues the results both link the sparse work in this area and provide a systematic analysis including marginal and total impacts

optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates in this paper we study the optimal management of an aggregated pension fund of defined benefit type in the presence of a stochastic interest rate we suppose that the sponsor can invest in a savings account in a risky stock and in a bond with the aim of minimizing deviations of the unfunded actuarial liability from zero along a finite time horizon we solve the problem by means of optimal stochastic control techniques and analyze the influence on the optimal solution of some of the parameters involved in the model

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

optimal investment with s shaped utility and trading and value at risk constraints an application to defined contribution pension plan abstract in this paper we investigate an optimal investment problem under loss aversion s shaped utility and with trading and value at risk var constraints faced by a defined contribution dc pension fund manager we apply the concavification and dual control method to solve the problem and derive the closed form representation of the optimal terminal wealth in terms of a controlled dual state variable we propose a simple and effective algorithm for computing the initial dual state value the lagrange multiplier and the optimal terminal wealth theoretical and numerical results show that the var constraint can significantly impact the distribution of the optimal terminal wealth and may greatly reduce the risk of losses in bad economic states due to loss aversion

comment on generating scenario trees for multistage decision problems in models of decision making under uncertainty one typically has to approximate the uncertainties by a limited number of discrete outcomes ha yland and wallace 2001 formulate a nonlinear programming problem to generate sucha limited number of discrete outcomes while satisfying specified statistical properties they have developed and employed this method for a stochastic multistage asset allocation problem when the method is applied to such financial optimization problems under uncertainty we argue here that it does not suffice to match statistical properties to obtain realistic outcomes the limited description of the uncertainty in such models should also exclude arbitrage opportunities and thereby be consistent with financial asset pricing theory we illustrate that the method proposed by ha yland and wallace can result in arbitrage opportunities in the scenario tree if only statistical properties are imposed we show how one can check ex post for the presence of arbitrage opportunities in a scenario tree by checking for the existence of solutions to sets of linear equations arbitrage opportunities can also be precluded ex ante in the scenario tree by adding constraints to the nonlinear programming problem of ha yland and wallace