Indexing pensions

Pension indexation should anchor the parameters of the pension system to one or more economic and demographic variables to ensure that the system is implemented in a sustainable way, while minimizing distortions affecting important economic choices. Arguing that financial sustainability, incentive compatibility and consistency across multiple government programs are critical, the author examine the many linkages between the various parameters of pension schemes. Finally, the author turn to the cost of the insurance dimension of indexation, and suggest that option pricing techniques could be used to price indexation guarantees, and that this approach may suggest refinements to indexation practice not thus far implemented.Emerging Markets,Debt Markets,Pensions&Retirement Systems,Economic Theory&Research,Markets and Market Access

Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning

This paper discusses the role of annuities in retirement planning. It begins by explaining the basic theory underlying the individual welfare gains available from annuitizing resources in retirement. It then contrasts these findings with the empirical findings that so few consumers behave in a manner that is consistent with them placing a high value on annuities. After reviewing the strengths and weaknesses of the large literature that seeks to reconcile these findings through richer extensions of the basic model, this paper turns to a somewhat more speculative discussion of potential behavioral stories that may be limiting demand. Overall, the paper argues that while further extensions to the rational consumer model of annuity demand are useful for helping to clarify under what conditions annuitization is welfare-enhancing, at least part of the answer to why consumers are so reluctant to annuitize will likely be found through a more rigorous study of the various psychological biases that individuals bring to the annuity decision.

The typology of partial credit guarantee funds around the world

This paper presents data on 76 partial credit guarantee schemes across 46 developed and developing countries. Based on theory, the authors discuss different organizational features of credit guarantee schemes and their variation across countries. They focus on the respective role of government and the private sector and different pricing and risk reduction tools and how they are correlated across countries. The findings show that government has an important role to play in funding and management, but less so in risk assessment and recovery. There is a surprisingly low use of risk-based pricing and limited use of risk management mechanisms.

Challenges of the mandatory funded pension system in the Russian Federation

The overwhelming number of contributors that have been allocated into the default option is one of the main characteristics of the Russian second pillar. This finding confirms that the level of financial literacy for most of the participants is not sufficient to make informed portfolio selections. The authors argue that the current system is perfectly consistent with a solid second pillar, but the authorities should focus their attention in the strategic asset allocation of pension funds. Since in the short and medium term it is unlikely to see improvements in financial literacy of individuals that may overcome the complexity of these decisions, the authorities can play an important role in designing default investment portfolios that can be aligned with expected replacement rates for the contributors. The current investment regulation of the default option induces investment in inefficient portfolios that are unlikely to bring returns above inflation, and probably will result in very low replacement rates for contributors. Further liberalization of the investments of the pension portfolio; improvements in the governance and supervision of the pension system; and greater certainty about the ownership of the funds are necessary steps to complete the pension reform launched in 2002.Debt Markets,Financial Literacy,Emerging Markets,Pensions&Retirement Systems,Access to Finance

Impact of irreversibility and uncertainty on the timing of infrastructure projects

This paper argues that because of the irreversibility and uncertainty associated with Build - Operate - Transfer (BOT) infrastructure projects, their financial evaluation should also routinely include the determination of the value of the option to defer the construction start-up. This ensures that project viability is comprehensively assessed before any revenue or loan guarantees are considered by project sponsors to support the project. This paper shows that the framework can be used even in the context of the intuitive binomial lattice model. This requires estimating volatility directly from the evolution of the net operating income while accounting for the correlation between the revenue and costs functions. This approach ensures that the uncertainties usually associated with toll revenues, in particular, are thoroughly investigated and their impact on project viability is thoroughly assessed. This paper illustrates the usefulness of the framework with data from an actual (BOT) toll road project. The results show that by postponing the project for a couple of years the project turns out to be viable, whereas it was not without the deferral. The evaluation approach proposed therefore provides a better framework for determining when and the extent of government financial support, if any, that may be needed to support a BOT project on the basis of project economics. The analysis may also be applicable to private sector investment projects, which are characterized by irreversibility and a high rate of uncertainty

Last Resort Gambles, Risky Debt and Liquidation Policy

This paper develops a real option model in which the interaction between debt, liquidation policy and risky investments is studied. We consider a manager who owns the firm and faces the opportunity to invest in risky pro jects which may bo ost current profits at the cost of bankruptcy if they turn out to be unsuccessful. These investments are "last resort gambles" in the sense that, if successful, they save the company from insolvency, while, if unsuccessful, they make liquidation unavoidable. We show that last resort gamble strategies delay liquidation. We study how the liquidation and the last resort gamble strategies are affected by the firmÕs capital structure.Last resort gambles; risky investments; liquidation policy; real options.

Martingale-Like Behavior of Prices

Asset prices set in a competitive market need not be martingales; that is, it need not be true that the best predictor of future prices is the current price. Nonetheless, statistical tests for this property are sometimes treated as tests for the proper functioning of an asset market; asset prices often seem to have the property to a close approximation, and it is sometimes supposed that the martingale ought to be imposed on econometric models of asset markets and forecasts made from them. This paper shows that under general conditions, which allow among other things for risk aversion among market participants, competitive asset prices ought to be locally -- over small units of time -- martingale-like. This implies that tests of proper functioning of the market ought to be conducted with data at fine time intervals; results of such tests should not be used to justify imposing the martingale property on a model's long-term projections of asset prices.

Coordinating public debt management with fiscal and monetary policies : an analytical framework

This paper proposes a sovereign asset and liability management framework for analyzing the inter-relationships between debt management, fiscal and monetary policies. It illustrates the consequences of uncoordinated policy mix and extends Sargent and Wallace (1981 and 1993) by including debt management. Examples of policy games played by fiscal, monetary, and debt management authorities reinforce the importance of policy separation and coordination to prevent domination by one authority over another which could lead to inconsistent policy mix.Debt Markets,External Debt,Emerging Markets,Public Sector Economics&Finance,Economic Theory&Research

A Comparative Analysis of Public and Private Political Risk Insurance Policies with Strategic Applications for Risk Mitigation

Generation of non-classical light is both of fundamental interest and a common condition for quantum information applications (QIA). One feasible type of single photon emitter for QIA is based on semiconductor quantum dots (QDs), due to their atomic-like energy structure and their possibility to be integrated with other semiconductor devices on the same chip. Sitecontrolled QDs with highly linear polarized emission are a prerequisite for certain QIA and a close to room temperature operation is demanded for widespread applications. III-nitride QD can have the deep connement potentials needed for high temperature operation, and the demonstration of single photon emission at room temperature was recently reported for a GaN QD [Nano Lett. 14, 982 (2014)]. Asymmetric III-nitride QD emits light with a high degree of linear polarization. To make site-controlled nitride-based QDs a promising approach is to deposit a thin layer of InGaN on top of hexagonal GaN micropyramids. QDs formed on the apex of the pyramids grown with this approach have been shown to exhibit single and sharp InGaN related emission lines with a high degree of linear polarization [Nano Lett. 11, 2415 (2011)]. A simple elongation of the pyramid base gives control of the polarization direction [Light: Sci. Appl. 3, e139 (2014)]. The work presented in this thesis deals with time correlation measurements, to measure, for the rst time, the single photon properties of these pyramidal QDs. A time correlated single photon spectroscopy (TCSPS) setup was assembled, tested and used to perform measurements on these pyramidal QDs. The TCSPS apparatus measures the time dierences between subsequent photons emitted from the sample. In the spectrally ltered light of one emission line in the emission spectra, e.g. exciton emission, of a QD two or more photons cannot be emitted simultaneously, i.e. the photons are sent out one by one. A histogram of the ensemble of measured time dierences (~106 events) will then for the ideal case have no events for τ = 0, and very few for close to zero. This histogram, when normalized, is under certain conditions equal to the second order coherence function g(2)(τ ). In reality, however, there are photons coming from other sources close to the QD, i.e. background emission, that reach the detector and reduce the dip in the correlation histogram for small τ. There is also an statistical uncertainty in the measured time dierences and nally the nite bin width used in the histogram that deteriorate the measured correlation function. To understand the in uence on g(2)(τ) from background emission, instrument response function and the bin width, on the measurement on excitonic emission, simulations and calculations were made. The crucial variables were, for our samples and setup, the level of the background emission and the instrument response function. A post growth process was developed to cover the lower parts of the pyramid sides as well as the area between the pyramids with a metal lm, to reduce the background emission. This reduces the background emission and largely improves the relative QD signal. As a result, signicant improved single photon characteristics were demonstrated. A measurement of the second order coherence function for the excitonic autocorrelation at a temperature of 12 K, gave for zero time delay ( = 0) a value of g(2)(0) = 0.24 and the residual value of the second order coherence function (0.24) could be in full explained by the three variables, background emission, instrument response function and bin width. The g(2)(0) value for correlation measurements at higher temperatures of 50 K and 80 K is also fully explained by the three variables, showing that the emission from the QD itself is ideal up to 80 K. This result underlines the great potential of these site controlled pyramidal dots as sources of fast polarized single photon emission, and provides the rst rigorous evidence of InGaN quantum dot formation on hexagonal GaN pyramids. We also show the rst proof of biexcitonic emission in this pyramidal QDs

Designing the payout phase of funded pension pillars in central and eastern European countries

Over the past decade or so, most Central and Eastern European countries have reformed their pension systems, significantly downsizing their public pillars and creating private pillars based on capitalization accounts. Early policy attention was focused on the accumulation phase but several countries are now reaching the stage where they need to address the design of the payout phase. This paper reviews the complex policy issues that will confront policymakers in this effort and summarizes recent plans and developments in four countries (Poland, Hungary, Estonia, and Lithuania). The paper concludes by highlighting a number of options that merit detailed consideration.Debt Markets,Pensions&Retirement Systems,Financial Literacy,Insurance&Risk Mitigation,Investment and Investment Climate