Testing Affine Term Structure Models in Case of Transaction Costs

In this paper we empirically analyze the impact of transaction costs on the performance of affine interest rate models. We test the implied (no arbitrage) Euler restrictions, and we calculate the specification error bound of Hansen and Jagannathan to measure the extent to which a model is misspecified. Using data on T-bill and bond returns we find, under the assumption of frictionless markets, strong evidence of misspecification of one- and two-factor affine interest rate models. This is in line with earlier research. However, we show that the pricing errors of these models are reduced considerably, if relatively small transaction costs are taken into account. The average transaction costs for T-bills, due to the bid-ask spread, are around 1.5 basis points. At this size of transaction costs and for monthly holding periods, the misspecification of one- and two-factor affine interest rate models becomes statistically insignificant and economically very small. For quarterly holding periods, higher transaction costs of around 3 basis points are required to avoid misspecification.

Dynamic portfolio and mortgage choice for homeowners

We investigate the impact of owner-occupied housing on financial portfolio and mortgage choice under stochastic inflation and real interest rates. To this end we develop a dynamic framework in which investors can invest in stocks and bonds with different maturities. We use a continuous-time model with CRRA preferences and calibrate the model parameters using data on inflation rates and equity, bond, and house prices. For the case of no short-sale constraints, we derive an implicit solution and identify the main channels through which the housing to total wealth ratio and the horizon affect financial portfolio choice. This solution is used to interpret numerical results that we provide when the investor has short-sale constraints. We also use our framework to investigate optimal mortgage size and type. A moderately risk-averse investor prefers an adjustable-rate mortgage (ARM), while a more risk-averse investor prefers a fixedrate mortgage (FRM). A combination of an ARM and an FRM further improves welfare. Choosing a suboptimal mortgage leads to utility losses up to 6%

Pricing Liquidity Risk with Heterogeneous Investment Horizons

We develop a new asset pricing model with stochastic transaction costs and investors with heterogenous horizons. Short-term investors hold only liquid assets in equilibrium. This generates segmentation effects in the pricing of liquid versus illiquid assets. Specifically, the liquidity (risk) premia of illiquid assets are determined by the heterogeneity in investor horizons and by the correlation between liquid and illiquid assets. We estimate our model for the cross-section of U.S. stocks and find that it fits average returns substantially better than a standard liquidity CAPM. Allowing for heterogenous horizons also leads to much larger estimates for the liquidity premia

A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds

We develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.

Driving examiners’ views on data-driven assessment of test candidates:An interview study

Vehicles are increasingly equipped with sensors that capture the state of the driver, the vehicle, and the environment. These developments are relevant to formal driver testing, but little is known about the extent to which driving examiners would support the use of sensor data in their job. This semi-structured interview study examined the opinions of 37 driving examiners about datadriven assessment of test candidates. The results showed that the examiners were supportive of using data to explain their pass/fail verdict to the candidate. According to the examiners, data in an easily accessible form such as graphs of eye movements, headway, speed, or braking behaviour, and colour-coded scores, supplemented with camera images, would allow them to eliminate doubt or help them convince disagreeing test-takers. The examiners were sceptical about higher levels of decision support, noting that forming an overall picture of the candidate’s abilities requires integrating multiple context-dependent sources of information. The interviews yielded other possible applications of data collection and sharing, such as selecting optimal routes, improving standardization, and training and pre-selecting candidates before they are allowed to take the driving test. Finally, the interviews focused on an increasingly viable form of data collection: simulator-based driver testing. This yielded a divided picture, with about half of the examiners being positive and half negative about using simulators in driver testing. In conclusion, this study has provided important insights regarding the use of data as an explanation aid for examiners. Future research should consider the views of test candidates and experimentally evaluate different forms of data-driven support in the driving test

A real-life observational study of the effectiveness of FACT in a Dutch mental health region

<p>Abstract</p> <p>Background</p> <p>ACT is an effective community treatment but causes discontinuity of care between acutely ill and currently stable patient groups. The Dutch variant of ACT, FACT, combines both intensive ACT treatment and care for patients requiring less intensive care at one time point yet likely to need ACT in the future. It may be hypothesised that this case mix is not beneficial for patients requiring intensive care, as other patient groups may "dilute" care provision. The effectiveness of FACT was compared with standard care, with a particular focus on possible moderating effects of patient characteristics within the case mix in FACT.</p> <p>Methods</p> <p>In 2002, three FACT teams were implemented in a Dutch region in which a cumulative routine outcome measurement system was in place. Patients receiving FACT were compared with patients receiving standard treatment, matched on "baseline" symptom severity and age, using propensity score matching. Outcome was the probability of being in symptomatic remission of psychotic symptoms.</p> <p>Results</p> <p>The probability of symptomatic remission was higher for SMI patients receiving FACT than for controls receiving standard treatment, but only when there was an unmet need for care with respect to psychotic symptoms (OR = 6.70, p = 0.002; 95% CI = 1.97 – 22.7).</p> <p>Conclusion</p> <p>Compared to standard care, FACT was more rather than less effective, but only when a need for care with respect to psychotic symptoms is present. This suggests that there is no adverse effect of using broader patient mixes in providing continuity of care for all patients with severe mental illness in a defined geographical area.</p

Pension fund performance and costs: small is beautiful.

Abstract Using the CEM pension fund data set, we document the cost structure and performance of a large sample of US pension funds. To date, self-reporting biases and a deficiency of comprehensive return and cost data have severely hindered pension fund performance studies. The bias-free CEM dataset resolves these issues and provides detailed information on fund-specific returns, benchmarks and costs for all types of pension plans and equity mandates. We find that pension fund cost levels are substantially lower than mutual fund fees. The domestic equity investments of US pension funds tend to generate abnormal returns (after expenses and trading costs) close to zero or slightly positive, contrasting the average underperformance of mutual funds. However, small cap mandates of defined benefit funds have outperformed their benchmarks by about 3% a year. While larger scale brings costs advantages, liquidity limitations seem to allow only smaller funds, and especially small cap mandates, to outperform their benchmarks. JEL Classifications : G23, G11, G14 Acknowledgements Our thanks to Keith Ambachtsheer, CEM Benchmarking Inc. for providing the pension fun

Cost-effectiveness of a vocational enablement protocol for employees with hearing impairment; design of a randomized controlled trial

Background: Hearing impairment at the workplace, and the resulting psychosocial problems are a major health problem with substantial costs for employees, companies, and society. Therefore, it is important to develop interventions to support hearing impaired employees. The objective of this article is to describe the design of a randomized controlled trial evaluating the (cost-) effectiveness of a Vocational Enablement Protocol (VEP) compared with usual care. Methods/Design. Participants will be selected with the 'Hearing and Distress Screener'. The study population will consist of 160 hearing impaired employees. The VEP intervention group will be compared with usual care. The VEP integrated care programme consists of a multidisciplinary assessment of auditory function, work demands, and personal characteristics. The goal of the intervention is to facilitate participation in work. The primary outcome measure of the study is 'need for recovery after work'. Secondary outcome measures are coping with hearing impairment, distress, self-efficacy, psychosocial workload, job control, general health status, sick leave, work productivity, and health care use. Outcome measures will be assessed by questionnaires at baseline, and 3, 6, 9, and 12 months after baseline. The economic evaluation will be performed from both a societal and a company perspective. A process evaluation will also be performed. Discussion. Interventions addressing occupational difficulties of hearing impaired employees are rare but highly needed. If the VEP integrated care programme proves to be (cost-) effective, the intervention can have an impact on the well-being of hearing impaired employees, and thereby, on the costs for the company as well for the society. Trial registration. Netherlands Trial Register (NTR): NTR2782. © 2012 Gussenhoven et al; BioMed Central Ltd