1,721,007 research outputs found
Good and bad banks
No full textIn the recent financial crisis, reorganizations of distressed financial institutions following the good bank and bad bank model were discussed. In the context of a structural framework and under perfect information, we analyze endogenous capital structure choices of an arrangement constituted by a large regulated unit which manages the more secure assets of a bank and a smaller division - possibly unregulated - which gathers the more risky and volatile ones. We question whether such an arrangement is a priori optimal and whether financial institutions have private incentives to set up different risk-classes of assets in separate entities. We investigate the effect of intra-group guarantees on optimal leverage and expected default costs. Numerical results show that these guarantees can enhance group value and limit default costs when the firm separates its more secure from its more risky assets in regulated entities
Ownership, Taxes and Default
Full text linkThis paper determines ownership and leverage of two units facing a tax-
bankruptcy trade-o�. Connected units have higher leverage and lower tax burden,
because of internal support through both bailouts and corporate dividends. Owner-
ship adjusts to additional tax provisions. A hierarchical group with a wholly-owned
subsidiary results from Thin Capitalization rules. The presence of corporate divi-
dend taxes generates horizontal groups, or a Special Purpose Vehicle, or a private
equity fund. Combinations of tax provisions contain tax savings, debt and default
in connected units. No bailout provisions, such as the Volcker rule, succeed in
reducing leverage and default
Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk
Full text linkThis paper provides a closed-form Value-at-Risk (VaR) for the net exposure of an annuity provider, taking into account both mortality and interest-rate risk, on both assets and liabilities. It builds a classical risk-return
frontier and shows that hedging strategies - such as the transfer of longevity risk - may increase the overall risk while decreasing expected returns, thus resulting in inefficient outcomes. Once calibrated to the 2010
UK longevity and bond market, the model gives conditions under which hedging policies become inefficient
Risk-return appraisal of longevity swaps
No full textThe authors show that the transfer of longevity risk through derivatives, such as longevity swaps, usually decreases the overall risk of a pension fund, while also decreasing expected returns, thus resulting in efficient outcomes. In some cases, however, this may increase the overall risk. Risk is measured by Value-at-Risk (VaR), taking into account the impact of both longevity and interest-rate shocks on assets and liabilities. After calibrating a hypothetical fund to the U.K. longevity and bond market, the authors show that when inefficiencies arise, they may be avoided with a partial transfer of longevity risk
A Bayesian copula model for stochastic claims reserving
No full textWe present a full Bayesian model for assessing the reserve requirement of multiline Non-Life insurance companies. Bayesian models for claims reserving allow to account for expert knowledge in the evaluation of Outstanding Loss Liabilities, allowing the use of additional information at a low cost. This paper combines a standard Bayesian approach for the estimation of marginal distribution for the single Lines of Business for a Non-Life insurance company and a Bayesian copula procedure for the estimation of aggregate reserves. The model we present allows to "mix" own-assessments of dependence between LoBs at a company level and market-wide estimates provided by regulators. We illustrate results for the single lines of business and we compare standard copula aggregation for different copula choices and the Bayesian copula approach
Basis Risk in Static versus Dynamic Longevity Risk Hedging
Full text linkThis paper provides a simple model for basis risk in a longevity framework, by separating common and idiosyncratic risk factors. Basis risk is captured by a single parameter, that measures the co-movement between the portfolio and the reference population. In this framework, the paper sets out the static, swap-based hedge for an annuity, and compares it with the dynamic, delta-based hedge, achieved using longevity bonds. We assume that the longevity intensity is distributed according to a CIR-type process and provide closed-form derivatives prices and hedges, also in the presence of an analogous CIR process for interest rate risk
Delta–Gamma hedging of mortality and interest rate risk
Full text linkOne of the major concerns of life insurers and pension funds is the increasing longevity of their beneficiaries. This paper studies the hedging problem of annuity cash flows when mortality and interest rates are stochastic. We first propose a Delta–Gamma hedging technique for mortality risk. The risk factor against which to hedge is the difference between the actual mortality intensity in the future and its “forecast” today, the forward intensity. We specialize the hedging technique first to the case in which mortality intensities are affine, then to Ornstein–Uhlenbeck and Feller processes, providing actuarial justifications for this selection. We show that, without imposing no arbitrage, we can get equivalent probability measures under which the {HJM} condition for no arbitrage is satisfied. Last, we extend our results to the presence of both interest rate and mortality risk. We provide a {UK} calibrated example of Delta–Gamma hedging of both mortality and interest rate risk
Single- and Cross-Generation Natural Hedging of Longevity and Financial Risk
Full text linkThis article provides natural hedging strategies for life insurance and annuity businesses written on a single generation or on different generations in the presence of both longevity and interest-rate risks. We obtain closed-form solutions for delta and gamma hedges against cohort-based longevity risk. We exploit the correlation between the mortality intensities of different generations and hedge the longevity risk of one cohort with products on other cohorts. An application with UK data on survivorship and bond dynamics shows that hedging is effective, even when rebalancing is infrequent
Longevity-linked assets and pre-retirement consumption/portfolio decisions
Full text linkWe solve the consumption/investment problem of an agent facing a stochastic mortality intensity. The investment set includes a longevity-linked asset, as a derivative on the force of mortality. In a complete and frictionless market, we derive a closed form solution when the agent has Hyperbolic Absolute Risk
Aversion preferences and a fixed financial horizon. Our calibrated numerical analysis on US data shows that individuals optimally invest a large fraction of their wealth in longevity-linked assets in the pre-retirement phase, because of their need to hedge against stochastic fluctuations in their remaining life-time at retirement
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