Endogenous Bubbles in Derivatives Markets: The Risk Neutral Valuation Paradox

This paper highlights the role of risk neutral investors in generating endogenous bubbles in derivatives markets. We find that a market for derivatives, which has all the features of a perfect market except completeness and has some risk neutral investors, can exhibit extreme price movements which represent a violation to the Gaussian random walk hypothesis. This can be viewed as a paradox because it contradicts wide-held conjectures about prices in informationally efficient markets with rational investors. Our findings imply that prices are not always good approximations of the fundamental values of derivatives, and that extreme price movements like price peaks or crashes may have endogenous origin and happen with a higher-than-normal frequency.Comment: 21 pages. The second version presents the following upgrades: improved precision in the definition of agents and their behaviour; simplification in the notation of the probability measure; simplification in section 4.1; addition of caveats in the conclusions. The results of the second version remain unchange

Lithuanian pension system’s reforms transformations and forecasts

The aim of this article is to describe the Lithuanian pension system, its reform process and its long-term financial sustainability. We define therefore the current reforms in the public pension system, influenced by the last economic crisis and social challenges. Also, we forecast the financial dynamics of the public pension system, in the light of raising social expenses (due to second pillar pension reforms) and of demographic trends (like ageing society and low fertility). Results reveal the long-term sustainability of the system, albeit at a cost of initial negative balances to be covered with public budget. Policy solutions could improve sustainability by encouraging and extending employment (especially for the disadvantaged) and by building trust in both public and private pension systems

The Ecology of defensive medicine and malpractice litigation

Using an evolutionary game, we show that patients and physicians can interact with predator-prey relationships. Litigious patients who seek compensation are the ‘predators’ and physicians are their ‘prey’. Physicians can adapt to the risk of being sued by performing defensive medicine. We find that improvements in clinical safety can increase the share of litigious patients and leave unchanged the share of physicians who perform defensive medicine. This paradoxical result is consistent with increasing trends in malpractice claims in spite of safety improvements, observed for example in empirical studies on anesthesiologists. Perfect cooperation with neither defensive nor litigious behaviors can be the Pareto-optimal solution when it is not a Nash equilibrium, so maximizing social welfare may require government intervention

The Ecology of defensive medicine and malpractice litigation

We analyse the relations between defensive medicine and medical malpractice litigation by an evolutionary game between physicians and patients. When medical treatment fails, patients may suit the physician and seek compensation. Conversely, physicians may prevent negligence charges by practising defensive medicine. We study the population dynamics and find the Nash equilibria and their Pareto-ranking. Furthermore, we show that, when the mixed-strategy equilibrium exists, then the shares of defensive physicians and litigious patients exhibit time-evolution paths similar to prey-predator relations in the Lotka-Volterra model, in which physicians can be seen as preys and litigious patients as their predators. Then, defensive physicians can be seen as adapted preys who improved their Darwinian fitness through mutation. The increase in adapted preys (i.e. defensive physicians) decreases predators’ fitness leading to a decrease in predators (i.e. litigious patients). In this context, we show that perfect cooperation with neither defensive physicians nor litigious patients can be the social first best. Our results may explain heterogeneous findings in empirical literature on these phenomena

Curing is caring? Liability reforms, defensive medicine and malpractice litigation in a post-pandemic world

We analyze different scenarios of defensive medicine in a unique game theoretic framework, representing a healing relationship between a physician and a patient. The physician should choose between providing the optimal treatment or an inferior one, which can amount to practicing defensive medicine. The patient should choose whether to litigate or not, if an adverse event occurs. When both agents have no dominant strategy, we obtain four scenarios representing the positive and negative forms of defensive medicine, with or without physician's moral hazard. We find that certain legal parameters can have opposite effects on the probabilities that physicians practice defensive medicine and that patients litigate, depending respectively on the form of defensive medicine and on the presence of moral hazard. This result can explain the ambiguous results, reported in empirical literature, of legal reforms aimed at discouraging defensive medicine and medical malpractice litigation

Defensive response to malpractice pressure in health care settings: A behavioral approach

This article offers an insight into the techniques for analyzing defensive response to malpractice pressure in health care settings, through a behavioral economic approach. It describes and comments recent advances in the game-theoretic literature on the contentious interactions between patients and physicians. We focus on three evolutionary games in which patients can resort to litigation against physicians, and the latter in turn can prevent negligence charges by practicing defensive medicine or by purchasing liability insurance. The aim of this article is to provide clinical and legal practitioners with points for reflection on strategies for making more efficient use of resources by managing conflicts between patients and physicians

Endogenous Bubbles in Derivatives Markets: The Risk Neutral Valuation Paradox

This paper highlights the role of risk neutral investors in generating endogenous bubbles in derivatives markets. We find that a market for derivatives, which has all the features of a perfect market except completeness and has some risk neutral investors, can exhibit extreme price movements which represent a violation to the Gaussian random walk hypothesis. This can be viewed as a paradox because it contradicts wide-held conjectures about prices in informationally efficient markets with rational investors. Our findings imply that prices are not always good approximations of the fundamental values of derivatives, and that extreme price movements like price peaks or crashes may have endogenous origin and happen with a higher-than-normal frequency.

A Stochastic Model for the Analysis of Demographic Risk in Pay-As-You-Go Pension Funds

This research presents an analysis of the demographic risk related to future membership patterns in pension funds with restricted entrance, financed under a pay-as-you-go scheme. The paper, therefore, proposes a stochastic model for investigating the behaviour of the demographic variable "new entrants" and the influence it exerts on the financial dynamics of such funds. Further information on pension funds of Italian professional categories and an application to the Cassa Nazionale di Previdenza e Assistenza dei Dottori Commercialisti (CNPADC) are then provided.

Which choice of participation level is the rational one for second-pillar pension funds in Lithuania?

In 2013, new rules for participants in second-pillar pension funds were introduced in Lithuania. Participants of private second-pillar pension funds had to make a choice regarding their further level of participation. Three options were given: a lower contribution rate, a higher contribution rate with a governmental subsidy, or stopping further contributions to the second-pillar system. The aim of this research is to evaluate the best rational choice for individuals of different gender and age, depending on the expected financial return to their second-pillar accounts. The results reveal that participating in the second-pillar system is always more convenient than abandoning participation in it, even under the conservative hypothesis of a zero real rate of return. A higher contribution rate can be the best choice for young and middle-aged working persons due to a governmental subsidy, moreover, it is more convenient because of higher expected returns