International Investment Positions: A Cross-Sectional Analysis

We explore some empirical properties of gross international investment positions. In a cross-section of countries, we find that more open countries with larger domestic financial markets tend to hold greater quantities of foreign assets and liabilities.international investment positions, international investment income flows, asset trade.

The National Pensions Reserve Fund: Pitfalls and Opportunities

This paper analyses some key issues concerning the new National Pensions Reserve Fund. We briefly review the basic demographic and economic trends that motivate the establishment of the Fund. We consider the pitfalls facing the operation of the Fund and argue that a complete ban on domestic investment would minimise the politicisation problem. At least initially, the Fund should adopt an aggressive investment strategy, with a large equity allocation. We further argue that asset allocation should take into account the co-variation of returns with domestic macroeconomic and fiscal variables. Finally, we discuss the organisational structure of the Fund and its implications for optimal performance.

Discrete-Time Interest Rate Modelling

This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing kernel be consistent with a pair of axioms, one giving the inter-temporal relations for dividend-paying assets, and the other ensuring the existence of a money-market asset. We show that the existence of a positive-return asset implies the existence of a previsible money-market account. A general expression for the price process of a limited-liability asset is derived. This expression includes two terms, one being the discounted risk-adjusted value of the dividend stream, the other characterising retained earnings. The vanishing of the latter is given by a transversality condition. We show (under the assumed axioms) that, in the case of a limited-liability asset with no permanently-retained earnings, the price process is given by the ratio of a pair of potentials. Explicit examples of discrete-time models are provided

Information, Inflation, and Interest

We propose a class of discrete-time stochastic models for the pricing of inflation-linked assets. The paper begins with an axiomatic scheme for asset pricing and interest rate theory in a discrete-time setting. The first axiom introduces a "risk-free" asset, and the second axiom determines the intertemporal pricing relations that hold for dividend-paying assets. The nominal and real pricing kernels, in terms of which the price index can be expressed, are then modelled by introducing a Sidrauski-type utility function depending on (a) the aggregate rate of consumption, and (b) the aggregate rate of real liquidity benefit conferred by the money supply. Consumption and money supply policies are chosen such that the expected joint utility obtained over a specified time horizon is maximised subject to a budget constraint that takes into account the "value" of the liquidity benefit associated with the money supply. For any choice of the bivariate utility function, the resulting model determines a relation between the rate of consumption, the price level, and the money supply. The model also produces explicit expressions for the real and nominal pricing kernels, and hence establishes a basis for the valuation of inflation-linked securities

Geometry of Thermodynamic States

A novel geometric formalism for statistical estimation is applied here to the canonical distribution of classical statistical mechanics. In this scheme thermodynamic states, or equivalently, statistical mechanical states, can be characterised concisely in terms of the geometry of a submanifold ${\cal M}$ of the unit sphere ${\cal S}$ in a real Hilbert space ${\cal H}$. The measurement of a thermodynamic variable then corresponds to the reduction of a state vector in ${\cal H}$ to an eigenstate, where the transition probability is the Boltzmann weight. We derive a set of uncertainty relations for conjugate thermodynamic variables in the equilibrium thermodynamic states. These follow as a consequence of a striking thermodynamic analogue of the Anandan-Aharonov relations in quantum mechanics. As a result we are able to provide a resolution to the controversy surrounding the status of `temperature fluctuations' in the canonical ensemble. By consideration of the curvature of the thermodynamic trajectory in its state space we are then able to derive a series of higher order variance bounds, which we calculate explicitly to second order.Comment: 7 pages, RevTe

Asymmetric Shocks and Monetary Policy in a Currency Union

We analyse the conduct of monetary policy in a currency union in the face of asymmetric shocks. In particular, we compare the stabilization properties of a currency union versus exchange rate arrangements and show how the relative performance of a currency union depends on the extent of economic integration in patterns of consumption and production and on the relative weights placed on price stability versus employment stability in the monetary authority's objective function.monetary union, stabilization.

Stable-1/2 Bridges and Insurance

We develop a class of non-life reserving models using a stable-1/2 random bridge to simulate the accumulation of paid claims, allowing for an essentially arbitrary choice of a priori distribution for the ultimate loss. Taking an information-based approach to the reserving problem, we derive the process of the conditional distribution of the ultimate loss. The "best-estimate ultimate loss process" is given by the conditional expectation of the ultimate loss. We derive explicit expressions for the best-estimate ultimate loss process, and for expected recoveries arising from aggregate excess-of-loss reinsurance treaties. Use of a deterministic time change allows for the matching of any initial (increasing) development pattern for the paid claims. We show that these methods are well-suited to the modelling of claims where there is a non-trivial probability of catastrophic loss. The generalized inverse-Gaussian (GIG) distribution is shown to be a natural choice for the a priori ultimate loss distribution. For particular GIG parameter choices, the best-estimate ultimate loss process can be written as a rational function of the paid-claims process. We extend the model to include a second paid-claims process, and allow the two processes to be dependent. The results obtained can be applied to the modelling of multiple lines of business or multiple origin years. The multi-dimensional model has the property that the dimensionality of calculations remains low, regardless of the number of paid-claims processes. An algorithm is provided for the simulation of the paid-claims processes.Comment: To appear in: Advances in Mathematics of Finance (A. Palczewski and L. Stettner, editors.), Banach Center Publications, Polish Academy of Science, Institute of Mathematic