Enumeration on proposed financial regulatory framework In Chapter 4, the proposed financial regulatory framework is shaped. The importance of quantitative tools and how to set them have been explained. In order to compare the outcomes from different portfolios, a pension model is constructed in Chapter 5. The accumulated assets in the rural pension funds are from the contributions and the investment proceeds. In this chapter, data about returns of assets as input in the pension model will be derived from the China’s financial market so as to calculate the risks and performances of a certain portfolio grounded on the given criteria. Data description and its processing will be discussed first. Later, the outputs of the pension model will be presented by means of histogram and statistical graphs, outlining final income distribution. Ultimately, information is assembled and summarized in tables. The purpose of using data is to explain how to use the recommended financial regulation framework. 6.1. Data There are three assets classes: Chinese one-year bank deposit (Cash), China 10Y government bond (Bond), and aggregated quarterly market return from aggregate A share traded in both Shanghai Exchange and Shenzhen Exchange (Stock). For each asset, there are 58 observations indicating quarterly returns from 1996 to 2011. The reasons why dealing with quarterly returns are for stocks it will generate huge deviation if annualizing monthly data or quarterly data. Information about bonds is obtained from Wind Info. Information about stocks is from GTA Information Technology Company. Information about Chinese interest rate is from the DataStream database. Historical information about the yield of China’s government bond is limited back to 1996, where the time frame of data in this thesis is trimmed. Foreign data is considered to be too risky to be incorporated after adjusted to the exchange rate. Data Description
6.3.3. The application of the regulatory framework This thesis is trying to provide a way of thinking about how to regulate the risk-taking behavior when the pension funds want to diversify portfolios. Two categories of quantitative tools are proposed: risk measures and performance measures. Risk measures are more emphasized by the regulators in order to protect the benefits of the members. Performance measures are mainly set for the members and the pension funds to help align the risk-taking behaviors of pension funds with the interest of members. The numerical examples have demonstrated that the proposed criteria will enable the members to look whether a pension plan is desirable, say, “I contribute 500 Yuan per year for at least 15 years and which plan can provide 600 Yuan after I retire with the greatest chance”. The pension fund also can re-consider their asset allocation strategy, say, “the members want to have 600 Yuan after they retire so how to reach this target with the greatest chance”. Timmermans, Schumacherz and Ponds (2011) have come up with a new pension product for DC pension plan. Their study helps the members and the pension funds to assess a pension plan in a way mentioned above. More importantly, their study makes the proposed financial regulatory framework implementable in the real world. Specifically, the members will be asked to decide several important parameters in advance, such as the desired retirement life (desired replacement rate) and the affordable contribution level, while the pension funds will try to maximize the chance in order to realize the desired target. The innovative idea in the mentioned pension products is that the likelihood of reaching the desired benefit is maximized by forgoing the possible excessive returns. The pension funds would trim the potential in both directions. The upside potential is used to enlarge the probability of reaching a target benefit level. In the new pension product designed by Timmermans et al. (2011), the members are required to define the parameters such as desired income and if the chance of realizing it is low then he/she may consider switching to a plan (1) with lower bars about desired benefit and guarantee, or (2) with a larger probability of ending up with the minimum benefit, (3) or by increasing contributions. For a given target and guarantee, the asset allocation strategy should maximize the chances of reaching the