Alternative framework for the fair valuation of participating life insurance contracts

In this communication, we develop suitable valuation techniques for a with-profit/unitized with profit life insurance policy providing interest rate guarantees, when a jump-diffusion process for the evolution of the underlying reference portfolio is used. Particular attention is given to the mispricing generated by the misspecification of a jumpdiffusion process for the underlying asset as a pure diffusion process, and to which extent this mispricing affects the profitability and the solvency of the life insurance company issuing these contracts

EX ANTE NON-MARKET VALUATION FOR NOVEL PRODUCT: LITERATURE REVIEW

This paper provides a critical review of the literature on non-market valuation methods to estimate the welfare impact of novel products; it is the first study to assess both observed data- and perception-based methods as non-market valuation methods. Observed databased methods include budgets, regression, mathematical programming, and simulation. Perceptions-based methods include the contingent valuation method, choice-based conjoint analysis and experimental methods. Findings imply that the preferred observed data-based method to estimate the ex ante economic impact of a new technology on the welfare of the farm household is a combination of simulation and mathematical programming. The preferred perceptionbased method for estimating the ex ante impact of a novel product on the welfare of an economic agent is represented by experimental methods. Findings also imply that observed-data based methods and more specifically mathematical programming are more popular for estimating the ex ante farm-level economic impact of a new technology. On the other hand, perception-based methods are more popular for estimating the economic impact of a novel product for consumers.Staff working papers, Dept. of Agricultural Economics, Internet publications, Purdue University

The Valuation of Corporate Debt with Default Risk

This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt restructuring which explicitly considers the inalienability of human capital. The study finds that even though in general the creditors will not liquidate the firm on the incidence of default, but nevertheless would liquidate the firm prematurely relative to the first best threshold. This agency problem leads to the breakdown of the capital structure irrelevance result.Debt pricing, default risk, inalienability of human capital

Asset Pricing Under The Quadratic Class

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi­closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.quadratic class; interest rates; term structure models; state price density; Markov process.

Capital Structure, Credit Risk, and Macroeconomic Conditions

This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of empirical implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for debt contracts with very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity.Dynamic capital structure, Credit spreads, Macroeconomic conditions

Promoting demand for organic food under preference and income heterogeneity

We examine the design of policies for promoting the consumption of green products under preference and income heterogeneity using organic products as an example. Two instruments are considered: a price subsidy for the organic products and a tax on the conventional products. Under income disparity, consumers with high income always prefer a socially optimal subsidy to a socially optimal tax, while low-income consumers prefer a tax on conventional products. When environmental policy is determined by the median voter, the policies implemented tend to be stricter than socially optimal policies if income differences are large

From Government to Regulatory Governance: Privatization and the Residual Role of the State

This paper reviews the state of thinking on the governance role of public ownership and control. We argue that the transfer of operational control over productive assets to the private sector represents the most desirable governance, due to the inherent difficulty for citizens to constrain political abuse relative to the ability of governments to regulate private activity. However in weak institutional environments the process needs to be structured so as to avoid capture of the regulatory process. The speed of transfer should be timed on the progress in developing a strong regulatory governance system, to which certain residual rights of intervention must be vested. After all, what are “institutions” if not governance mechanisms with some degree of autonomy from both political and private interests? The gradual creation of institutions partially autonomous from political power must become central to the development of an optimal mode of regulatory governance. We advance some suggestions about creating accountability in regulatory governance, in particular creating an internal control system based on a rotating board representative of users, producers and civil society, to be elected by a process involving frequent reporting and disclosure.Regulatory Governance, Privatization

Option Valuation with Conditional Heteroskedasticity and Non-Normality

We provide results for the valuation of European style contingent claims for a large class of specifications of the underlying asset returns. Our valuation results obtain in a discrete time, infinite state-space setup using the no-arbitrage principle and an equivalent martingale measure. Our approach allows for general forms of heteroskedasticity in returns, and valuation results for homoskedastic processes can be obtained as a special case. It also allows for conditional non-normal return innovations, which is critically important because heteroskedasticity alone does not suffice to capture the option smirk. We analyze a class of equivalent martingale measures for which the resulting risk-neutral return dynamics are from the same family of distributions as the physical return dynamics. In this case, our framework nests the valuation results obtained by Duan (1995) and Heston and Nandi (2000) by allowing for a time-varying price of risk and non-normal innovations. We provide extensions of these results to more general equivalent martingale measures and to discrete time stochastic volatility models, and we analyze the relation between our results and those obtained for continuous time models. Nous présentons les résultats d’une étude portant sur l’évaluation de créances éventuelles de style européen pour une grande variété de caractéristiques liées au rendement des actifs sous-jacents. Les résultats de notre évaluation proposent en temps discret une formule état-espace infinie, à partir du principe de non-arbitrage et d’une mesure de martingale équivalente. Notre approche permet de tenir compte de formes générales d’hétéroscédasticité dans les rendements et d’obtenir, dans des cas spéciaux, des résultats d’évaluation liés aux processus homoscédastiques. Elle permet aussi de considérer les innovations conditionnellement non normales en matière de rendement, ce qui représente un facteur critique, compte tenu du fait que l’hétéroscédasticité ne permet pas, à elle seule, de saisir pleinement le caractère ironique de l’option. Nous analysons une catégorie de mesures de martingale équivalentes dont la dynamique du rendement risque-neutre obtenu est de la même famille de distribution que la dynamique du rendement physique. Dans ce cas, notre cadre d’étude soutient les résultats d’évaluation obtenus par Duan (1995) et par Heston et Nandi (2000) et tient compte du coût du risque variant dans le temps et des innovations non normales. Nous étendons ces résultats aux mesures de martingale équivalentes plus générales et aux modèles de volatilité stochastique en temps discret et analysons aussi la relation entre nos résultats et ceux obtenus dans le cas des modèles en temps continu.GARCH, risk-neutral valuation, no-arbitrage, non-normal innovations, GARCH (hétéroscédasticité conditionnelle autorégressive généralisée), évaluation du risque neutre, absence d’arbitrage, innovations non normales