Employees Provident Fund (EPF) Malaysia: Generic models for asset and liability management under uncertainty

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.We describe Employees Provident Funds (EPF) Malaysia. We explain about Defined Contribution and Defined Benefit Pension Funds and examine their similarities and differences. We also briefly discuss and compare EPF schemes in four Commonwealth countries. A family of Stochastic Programming Models is developed for the Employees Provident Fund Malaysia. This is a family of ex-ante decision models whose main aim is to manage, that is, balance assets and liabilities. The decision models comprise Expected Value Linear Programming, Two Stage Stochastic Programming with recourse, Chance Constrained Programming and Integrated Chance Constraints Programming. For the last three decision models we use scenario generators which capture the uncertainties of asset returns, salary contributions and lump sum liabilities payments. These scenario generation models for Assets and liabilities were developed and calibrated using historical data. The resulting decisions are evaluated with in-sample analysis using typical risk adjusted performance measures. Out- of- sample testing is also carried out with a larger set of generated scenarios. The benefits of two stage stochastic programming over deterministic approaches on asset allocation as well as the amount of borrowing needed for each pre-specified growth dividend are demonstrated. The contributions of this thesis are i) an insightful overview of EPF ii) construction of scenarios for assets returns and liabilities with different values of growth dividend, that combine the Markov population model with the salary growth model and retirement payments iii) construction and analysis of generic ex-ante decision models taking into consideration uncertain asset returns and uncertain liabilities iv) testing and performance evaluation of these decisions in an ex-post setting.This stuyd is funded by the Universiti Teknologi MARA Malaysia

Malaysia’s pension system : performance and strategies for improvement

Population ageing and economic uncertainties made many question the extent to which current pension systems are able to provide adequate pension savings that can at least maintain standards of living during the retirement period. Much focus on pension issues and challenges has centred on developed nations rather than developing countries. In general, the framework of pension systems in developed countries are expected to be different in terms of policy and regulation than pension system practices in developing countries. As a project largely contributing to the literature for developing countries, this thesis seeks to explore the performance of the Malaysian pension system and investment strategy of Malaysia’s defined contribution pension scheme known as the Employees Provident Fund (EPF). This thesis is composed of three parts. The first part of this thesis explores the development and evolution of pension system in both developed and developing countries as well as analysing the performance and experiences in both nations. The second part of this thesis presents the performance of a pension system, primarily for the EPF. Finally, this thesis extends the investment analysis through analysing the impact of alternative assets on the EPF’s strategy. The significant of this study are: i) based on lesson from others country’s experiences, this thesis provides a comprehensive documentation analysis that gives a greater understanding of Malaysia’s pension system performance and future directions of the system towards preparing the nation for the ageing population; ii) with different policies and regulations from other country practices, this study develops the investment model methodologically tailored to the EPF case. iii) we extend a well-established TSP study for the EPF done by Hussin (2012) considering alternative international assets for the EPF context. Here, we provide new evidence of optimal investment strategy for the EPF after taking into account international diversification

Efisiensi Bank Pembangunan Daerah Menggunakan Data Envelopment Analysis dan Stochastik Frontier Analysis

The study employs the three-stage banking models to investigate the performance of 26 state banks in Indonesia from 1994 to 2004.  Data envelopment analysis (DEA) results indicate that the average efficiency of state banks was 38.3 percent and deteriorated when the financial crisis struck Indonesia in 1997.  Using stochastic frontier analysis (SFA) method, findings suggest that, on average, banks obtained 62.8 percent efficiency.  Findings also suggest that banks’ technical inefficiency is affected significantly by government intervention, location, and ownership.  Finally, state banking performance was tested by correlating the DEA and SFA models and found no statistically significant correlation.  Reported new findings of this paper are additions to banking efficiency literature

Key performance indicators for sustainable manufacturing evaluation in automotive companies

The automotive industry is regarded as one of the most important and strategic industry in manufacturing sector. It is the largest manufacturing enterprise in the world and one of the most resource intensive industries of all major industrial system. However, its products and processes are a significant source of environmental impact. Thus, there is a need to evaluate sustainable manufacturing performance in this industry. This paper proposes a set of initial key performance indicators (KPIs) for sustainable manufacturing evaluation believed to be appropriate to automotive companies, consisting of three factors divided into nine dimensions and a total of 41 sub-dimensions. A survey will be conducted to confirm the adaptability of the initial KPIs with the industry practices. Future research will focus on developing an evaluation tool to assess sustainable manufacturing performance in automotive companies

ESSAYS ON LONG-TERM CARE AND INSURANCE MANAGEMENT

This thesis is composed of two parts. The first part encompasses two essays on long-term care (LTC) in Europe and Switzerland. LTC can be defined as help provided to elderly in needs with activities of daily living (ADL) that can be delivered as informal care by persons from the social network or as formal care by professional caregivers. The first paper focuses on individuals’ characteristics that influence the probability to report limitations in ADLs and the probability to report the receipt of formal care in Europe. We find a significant effect of social, demographic and medical factors on both quantities of interest. Our results highlight the lower effect of cancer when compared to other diseases. Further, we observe a decrease of formal care usage when the partner is present in the household. This effect is stronger for domestic tasks and in case of male respondents. In addition, elderly in countries with family care LTC schemes report less formal care than those in countries with other schemes. The second essay extends the measure of dependence by considering instrumental ADLs and functional limitations. Thereby the focus is on identifying the relationship between formal and informal care, that is, whether this link is complementary or substitutional. By using a Structural Equation Modeling approach and data from a Swiss survey, the link is found to be both of complementary and substitutional nature. The second part of the thesis is dedicated to insurance management. We study the impact of natural and man-made catastrophes on the valuation of insurance companies. Furthermore, we analyze the relationship between the effect on the valuation and companies’ characteristics, namely the market capitalization, the subsector, the revenues and the geographical origin. We do not find any clear pattern of the stock price behavior for any type of the considered catastrophes. Despite the fact, that we find no significance of the geographical origin coefficient in the regression, we observe that North American companies are more influenced by local events, such as hurricanes on US territory and experience almost no effect from external ones. In contrast, European companies respond to all events, including international ones. Further, reinsurance companies are found to be more sensitive than property and casualty (P&C) companies. Finally, in the last essay, we study the properties of stochastic programming for the asset allocation in a framework of Swiss pension funds under solvency constraints. We empirically study the convergence of the initial asset allocation with respect to the quality of the approximation of the stochastic returns. We observe results for the probability of deficit as well as for the expected value of the deficit given shortage. Further, we test the sensitivity of the above-mentioned characteristics to changes in internal model parameters. Finally, the effect of misestimating the stocks’ volatility and the bonds’ expected return on the initial asset allocation is examined. -- Cette thèse est composée de deux parties. La première partie comprend deux essais sur les soins de longue durée en Europe et en Suisse. Les soins de longue durée peuvent être définis comme l’aide fournie aux personnes âgées ayant des difficultés avec les activités de la vie quotidienne (AVQ) et peuvent être dispensés sous forme de soins informels par des personnes de leur entourage ou sous forme de soins formels dispensés par des aidants professionnels. Le premier essai porte sur les caractéristiques des individus qui influencent la probabilité de rapporter des limitations dans les AVQ et sur la probabilité de recourir à des soins formels en Europe. Nous constatons un effet significatif des facteurs sociaux, démographiques et médicaux sur les deux quantités d’intérêt. Nos résultats mettent en évidence un effet moindre du cancer par rapport à d’autres maladies. De plus, nous observons une diminution de l’utilisation des soins formels lorsque le partenaire est présent dans le ménage. Cet effet est plus fort pour les tâches domestiques et dans le cas des sujets masculins. En outre, les personnes âgées des pays où les régimes de soins de longue durée sont basés sur l’aide de la famille font état de moins de soins formels que celles des pays dotés d’autres régimes. Le deuxième essai se concentre sur la mesure de la dépendance en prenant en compte les activités instrumentales de la vie quotidienne (AIVQ) et les limitations fonctionnelles. Ainsi, l’accent est mis sur l’identification de la relation entre les soins formels et informels, c’est-à-dire si ce lien est complémentaire ou substitutionnel. En utilisant une approche de modélisation par équation structurelle et des données provenant d’une enquête suisse, le lien s’avère être à la fois complémentaire et substitutif. La deuxième partie de la thèse est consacrée à la gestion des assurances. Nous étudions l’impact des catastrophes naturelles et d’origine humaine sur l’évaluation des sociétés d’assurance. En outre, nous analysons la relation entre les caractéristiques des sociétés et l’effet sur leur évaluation, à savoir la capitalisation boursiére, le sous-secteur, les revenus et l’origine géographique. Pour tous les événements catastrophiques considérés, nous ne trouvons pas de tendance claire dans le comportement du cours de l’action. Malgré le fait que le coefficient de régression correspondant à l’origine géographique n’est pas significatif, nous observons que les entreprises nord-américaines sont davantage influences par des événements locaux, tels que des ouragans sur le territoire américain, et pratiquement pas affectées en cas de catastrophes en dehors du territoire. En revanche, les entreprises européennes sont sensibles à tous les événements, y compris internationaux. En outre, les sociétés de réassurance se révèlent plus sensibles que les sociétés d’assurance Incendie, Accidents et Risques Divers (IARD). Enfin, dans le dernier essai, nous étudions les propriétés de la programmation stochastique dans le cadre de la répartition des actifs pour des fonds de pension suisses soumis à des contraintes de solvabilité. Nous étudions de manière empirique la convergence de la répartition initiale des actifs par rapport à la qualité de l’approximation des rendements stochastiques. Nous observons des résultats pour la probabilité de ruine ainsi que pour la valeur attendue du déficit en cas de défaut. De plus, nous testons la sensibilité des caractéristiques susmentionnées en modifiant différents paramètres internes du modèle. Enfin, les effets d’une mauvaise estimation de la volatilité des actions et du rendement attendu des obligations sur la répartition initiale des actifs sont examinés

Macroeconomic Volatility and Sovereign Asset-Liability Management

For most developing countries, the predominant source of sovereign wealth is commodity related export income. However, over-reliance on commodity related income exposes countries to significant terms of trade shocks due to excessive price volatility. The spillovers are pro-cyclical fiscal policies and macroeconomic volatility problems that if not adequately managed, could have catastrophic economic consequences including sovereign bankruptcy. The aim of this study is to explore new ways of solving the problem in an asset-liability management framework for an exporting country like Ghana. Firstly, I develop an unconditional commodity investment strategy in the tactical mean-variance setting for deterministic returns. Secondly, in continuous time, shocks to return moments induce additional hedging demands warranting an extension of the analysis to a dynamic stochastic setting whereby, the optimal commodity investment and fiscal consumption policies are conditioned on the stochastic realisations of commodity prices. Thirdly, I incorporate jumps and stochastic volatility in an incomplete market extension of the conditional model. Finally, I account for partial autocorrelation, significant heteroskedastic disturbances, cointegration and non-linear dependence in the sample data by adopting GARCH-Error Correction and dynamic Copula-GARCH models to enhance the forecasting accuracy of the optimal hedge ratios used for the state-contingent dynamic overlay hedging strategies that guarantee Pareto efficient allocation. The unconditional model increases the Sharpe ratio by a significant margin and noticeably improves the portfolio value-at-risk and maximum drawdown. Meanwhile, the optimal commodities investment decisions are superior in in-sample performance and robust to extreme interest rate changes by up to 10 times the current rate. In the dynamic setting, I show that momentum strategies are outperformed by contrarian policies, fiscal consumption must account for less than 40% of sovereign wealth, while risky investments must not exceed 50% of the residual wealth. Moreover, hedging costs are reduced by as much as 55% while numerically generating state-dependent dynamic futures hedging policies that reveal a predominant portfolio strategy analogous to the unconditional model. The results suggest buying commodity futures contracts when the country’s current exposure in a particular asset is less than the model implied optimal quantity and selling futures contracts when the actual quantity exported exceeds the benchmark.Open Acces