An environment test for risk tolerance assessment verification in lifelong financial planning for households

Purpose: The aim of this study is to propose and discuss a theoretical framework of a testing environment for verification of household risk tolerance assessment methods, based on a financial plan optimization model. It is intended to be suited to the specificity of life-long financial planning for households. Design/Methodology/Approach: The assumption of the proposed testing environment is that a risk tolerance measure should be used as part of the input to a household life-long financial plan optimization procedure. The risk of the received plan should therefore be consistent with the risk tolerance estimated at the beginning. Findings: After the analysis of the structure of the existing financial plan optimization model (developed by the Authors as part of some former research project) it has been concluded that, after some modifications, it is possible to use it as a test environment for verification of household risk tolerance assessment methods. Practical Implications: The possibility of verification of a risk tolerance assessment method for a household life-long financial plan is necessary to be able to construct plans that are really suited to household needs. So far, there do not exist proper household risk aversion measures, nor methods of household risk aversion estimation, that would consider the nature of risk that is present in the household life-long financial planning. But as soon as such methods are developed, it will be necessary to be able to verify whether the risk tolerance estimates obtained from them are at all reliable and if they are in line with how households understand their risk tolerance. Originality/Value: This study is a step towards verifying household risk tolerance models for lifetime financial plans, which is a new research area, not yet undertaken in the literature. It is very important both from the point of view of the further development of the theory of personal finance and for the practice of financial planning.peer-reviewe

Pomiar ryzyka planu finansowego gospodarstwa domowego

When building a financial plan for a household, one usually needs to take many risk factors into account. These are the factors that have an influence on the shape of the future term structure of household incomes and expenditures. The factors may be of very differentiated nature, which means that their impact on the cash-flow term structure may be different both in terms of the underlying mechanism and strength. In this field of research, the existing literature does not provide, however, any proposals of integrated risk measurement. At the same time, the ability to measure risk of household financial plans in an integrated way would be very useful, as it would allow to select or compare plans with respect to the joint risk of a plan (to be more precise – the joint risk that the plan will fail to be successfully realized). The aim of this article is to propose a method or methods that would allow to measure financial plan risk in an integrated way. The integration should include different risk types, all financial goals that have been set by the household, all sources of financing and all sub-periods of the long-term life-cycle period of household financial planning. The approach, originally proposed by the authors of this article, may not only facilitate comparison of financial plans with respect to risk, but it may be also serve as a plan-acceptance decision-making instrument. Integrated risk measures may be also used within the very optimization procedure. They may be parts of the boundary conditions or even be embedded into the optimization function itself.Konstrukcja planu finansowego dla gospodarstwa domowego wymaga wzięcia pod uwagę wielu czynników ryzyka, które determinują kształtowanie przyszłej ścieżki dochodów i wydatków gospodarstwa domowego. Czynniki te mogą mieć bardzo różną naturę, a także bardzo zróżnicowany wpływ na strukturę przepływów finansowych. W literaturze brakuje jednak propozycji zintegrowanego pomiaru ryzyka, który umożliwiłby porównanie planów finansowych pod względem łącznego ryzyka ich realizacji. Celem artykułu jest zaproponowanie metod pomiaru ryzyka planu finansowego w sposób zintegrowany. W podejściu tym integracja powinna obejmować różne rodzaje ryzyka, wszystkie cele finansowe gospodarstwa domowego, wszystkie sposoby finansowania oraz wszystkie okresy w cyklu życia gospodarstwa domowego. Zaproponowane oryginalne podejście pozwala nie tylko na porównanie planów finansowych między sobą ze względu na poziom ryzyka, ale również tworzy narzędzie do podejmowania decyzji o akceptacji planu. Zintegrowane miary ryzyka mogą też być wykorzystane w samym procesie optymalizacji. Poza tym mogą stanowić ograniczenie lub wręcz element funkcji celu w procedurze optymalizacyjnej

Household finance

Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the life cycle. We then discuss household choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision making, financial literacy, cognition and educational interventions. We also discuss literature on the provision and consumption of financial advice

Demographic transition, pension schemes’ investment, and the financial market

There have been lots of theoretical and empirical debates about the impact of demographic transition on the financial market. The main economic theory that is often cited to explain the causality is the lifecycle hypothesis. Since this hypothesis suggests that a lifetime saving pattern of individuals will have an inverted U-shape profile, there is a widely concern for the ‘market meltdown scenario’ whereby the stock market might collapse following the retirement of baby-boomers who will begin to dissipate their accumulated wealth. However, the actual dissaving rates of retired households appear to be relatively low. Therefore, no consensus regarding the actual causality of the demographic impact on asset prices has been reached. This thesis attempts to solve this puzzle by arguing that the strong relationship between asset prices and demographic variables observed since the 1960s may primarily result from a shift in the institutional structure of the financial market. The emergence of financial institutions, particularly pension schemes, has changed the way that the financial market operates. Instead of directly holding assets themselves, households have been using financial services provided by these institutions to manage their investments. By using a panel data from the Family Expenditure Survey, lifetime households’ participation rates in occupational pension schemes and personal pension plans are shown to significantly exhibit a strong hump-shape age pattern with a peak at 35-45. Interestingly, this age group has further been proved to have a long-term significant impact on UK equity prices. After analysing DB pension schemes employed by FTSE100 firms, the long-term asset allocation of these investors appears to significantly be influenced by the age structures of their policyholders. Therefore, the insight gleaned from this thesis strongly suggests that the investment behaviour of pension schemes may represent the underlying mechanism explaining the strong correlation between asset prices and demographic patterns

Housing Finance Innovation and How Canadians May Evaluate Homeownership as a Critical Asset Allocation

This research makes a significant and important contribution to the literature on Canadian housing finance by identifying four regimes that represent a continuum toward a market-based mortgage system where Canadian households can readily access mortgage credit. The history of housing finance in Canada, like many nations, has been plagued by a lack of an effective way to channel savings into mortgages, and this has influenced households in the process of making the rent versus buy decision to obtain housing services. Innovation and advancements in Canada`s mortgage lending system and integration of mortgage funding with capital markets from 1900 to 2010, specifically mortgage backed securities enhanced with mortgage loan insurance, allow more households to shift from renting to homeownership. A cross-country comparison of OECD nations illustrates that a domestic mortgage market system must be sufficiently liberal and flexible so that a representative household can evaluate homeownership as an investment decision. In addition, a stylized Markowitz optimal portfolio selection model looks at homeownership as a critical asset allocation in the presence of bonds and equities in two Canadian markets: Metropolitan Toronto and Metropolitan Vancouver. The conclusion is that when the long-term mortgage loan borrowing rate is used to construct the capital allocation line, the efficient frontier is a blend of bonds and equities, and housing only forms part of an optimal risky portfolio over long holding periods. The economic model and empirical results show that single detached housing and apartment condominiums offer households different economic returns. A household may respond to this reality through deferring maintenance and holding the housing asset for long periods to maximize the implied imputed return. The instructive finding is that homeownership is a long-term investment that hedges rent risk, and if a household does not over-consume housing, there are significant gains from imputed rent. The homeownership decision for most households is often based on maximum permissible mortgage credit granting rules rather than optimal portfolio selection. The equilibrium approach verifies the probability distribution of positive economic returns in both Metropolitan Toronto and Metropolitan Vancouver over long holding periods

Two essays on public sector reform.

Yuen Chi-lok.Thesis (M.Phil.)--Chinese University of Hong Kong, 2003.Includes bibliographical references (leaves 63-70).Abstracts in English and Chinese.Abstract --- p.iAcknowledgement --- p.iiiTable of Contents --- p.ivList of Tables --- p.vChapter Chapter 1 --- The Dynamics of the Labor Market across Public and Private Sectors in a Theoretical ModelChapter 1.1 --- Introduction --- p.1Chapter 1.2 --- Empirical Studies --- p.4Chapter 1.3 --- The Model --- p.7Chapter 1.3.1 --- Preferences of Working Agents --- p.7Chapter 1.3.2 --- Production Technology --- p.8Chapter 1.4 --- "Optimization, Equilibrium and Some Comparative Static Results" --- p.10Chapter 1.4.1 --- Optimization Problems --- p.10Chapter 1.4.2 --- Market Equilibrium --- p.15Chapter 1.4.3 --- Comparative Static Results --- p.16Chapter 1.5 --- Extensions --- p.22Chapter 1.5.1 --- Wage Structure in Public Sector and its Effects --- p.22Chapter 1.5.2 --- How the Wage Level of the Public Sector Affects the Private Labor Market --- p.24Chapter 1.6 --- Conclusion --- p.29Chapter Chapter 2 --- Pillars for the Growing Dragon: Social Security in China --- p.31Chapter 2.1 --- Introduction --- p.31Chapter 2.2 --- The Evolution of the Chinese Social Security System --- p.33Chapter 2.2.1 --- The Establishment of the Social Security System since1949 --- p.33Chapter 2.2.2 --- The Reform in 1980s --- p.35Chapter 2.3 --- The Existing Chinese Social Security System --- p.39Chapter 2.3.1 --- Pension Reform --- p.42Chapter 2.3.2 --- Unemployment Insurance Reform --- p.45Chapter 2.3.3 --- Medical Insurance Reform --- p.50Chapter 2.4 --- Sustainability Problem in the Chinese Social Security System --- p.53Chapter 2.5 --- Conclusion --- p.60References --- p.63Appendix --- p.7

Heuristics and Human Decision - Making in Strategic Foresight: Behavioural Insights for an Improved Foresight Framework

Drawing on literature from diverse fields of study on human perceptions of risk and decision making under uncertainty, this investigation highlights some of the behavioural insights and implications that emerge for strategic foresight and scenario planning. From an extensive review and synthesis of the literature, themes in mental shortcuts, heuristics and biases that influence decision making and perceptions of probabilities were generated and organized for further exploration through a concept mapping approach. Using narrative, findings were applied to and illuminated through a contemporary case study of proposed nuclear waste storage in an Ontario community. Behavioural insights were applied to two strategic foresight frameworks, and recommended improvements to existing models were presented and discussed

DEALING WITH RISK IN AGRICULTURE: A CROP LEVEL ANALYSIS AND MANAGEMENT PROPOSAL FOR ITALIAN FARMS

Risk management plays a critical role in agriculture, which is particularly exposed to multiple and heterogeneous risk factors. In addition to the traditional basic risks that generally characterize any business venture, agriculture faces external factors, generally difficult to control and with a strong impact on farm profitability. These are firstly environmental (pests and diseases) and climatic conditions that affect the quantity and quality of agricultural production, but also the structural constraints of the agricultural market, which is characterised by a high degree of supply rigidity, price volatility and inelasticity of demand. This leads to the need to implement risk management tools, some of which aimed at income stabilization (already in place by many years in other countries, i.e. the USA and Canada) and requiring the active participation of the farmer on the one hand and of the institutional system on the other. In order to suggest risk management solutions to Italian farmers, this thesis makes efforts in simulating the feasibility of a risk management tool introduced in the EU with Regulation (EU) No 2017/2393 but not yet implemented: the sector-specific Income Stabilization Tool. This is based on a public-private partnership and is managed by a mutual fund steered by associated farmers. These latter pay an annual contribution to become eligible for receiving indemnities when experiencing a severe income drop. Unlike others that are limited to covering specific types of risk, this tool makes it possible to look at the farmer's entire income risk considering the correlation among several sources of risk (particularly between production level and prices). This thesis provides first a theoretical background on risk analysis and risk management in agriculture (concepts, classification, literature and methodology). Second, the role of policies within the European Union framework and, Italy, in particular, has been viewed by analysing the normative framework and the reference context of insurance instruments in agriculture. Subsequently, since assessing farm profitability and economic risk is important to support farmers’ decisions about investments and whether or not to join the insurance instruments, an explorative analysis on profitability and riskiness of a perennial crop in Italy, such as hazelnut, has been done. Finally, the implementation of a sector-specific 3 Income Stabilization Tool for the crop investigated has been suggested by following this structure: - assessment of the profitability and risk of hazelnut production, in the four main production areas in Italy; - assessment of the most important parameters generating risk; - simulation of the feasibility of using an income risk management tool to make supply and demand able to interact and its impact on the level and riskiness of farm income; - assessment of the geographical scale at which the Income Stabilization Tool scheme could be implemented. Using data from the Italian Farm Accountancy Data Network on hazelnut producing farms, a downside risk analysis showed that riskiness is distributed in different ways on the entire country with sensitivity on yield risk affecting farmers' income level and economic risk. The simulation implemented in this study demonstrates the tool could reduce substantially the risk faced by hazelnut farmers in Italy. The additional public support is essential in case of joining the tool. In addition, in view of the differences within the Italian territory, the farmers’ payments should be differentiated based on the requisites and the specific climatic and environmental characteristics of each region. Concurrently, recourse to a national mutual fund would make it possible to benefit from the principle of risk pooling