Optimal portfolio and spending rules for endowment funds

We investigate the role of different spending rules in a dynamic asset allocation model for university endowment funds. In particular, we consider the fixed consumption-wealth ratio (CW) rule and the hybrid rule which smoothes spending over time. We derive the optimal portfolios under these two strategies and compare them with a theoretically optimal (Merton) strategy. We show that the optimal portfolio with habit is less risky compared to the optimal portfolio without habit. A calibrated numerical analysis on U.S. data shows, similarly, that the optimal portfolio under the hybrid strategy is less risky than the optimal portfolios under both the CW and the classical Merton strategies, in typical market conditions. Our numerical analysis also shows that spending under the hybrid strategy is less volatile than the other strategies. Thus, endowments following the hybrid spending rule use asset allocation to protect spending. However, in terms of the endowment’s wealth, the hybrid strategy comparatively outperforms the conventional Merton and CW strategies when the market is highly volatile but under-performs them when there is strong stock market growth and low volatility. Overall, the hybrid strategy is effective in terms of stability of spending and intergenerational equity because, even if it allows short-term fluctuation in spending, it ensures greater stability in the long run

Robust electronic circuit design using evolutionary and Taguchi methods

Bibliography: pages 80-81.In engineering, there is a wide range of applications where genetic optimizers are used. Two genetic optimizers used in this thesis namely, Population Based Incremental Learning ( PBIL ) and Cross generational selection Heterogeneous crossover Cataclysmic mutation ( CHC ), are tested on a series of circuit problems to fmd if robust electronic circuits can be built from evolutionary methods. The evolutionary algorithms were used to search the space of discrete component values from a range of manufactured preferred values to obtain robust electronic circuits. Parasitic effects were also modelled in the simulation to provide for a more realistic circuit

Effects of hydrocarbon fouling on reverse osmosis membranes

Organic fouling in reverse osmosis (RO) has been studied using model hydrocarbons such as hexane and diesel. A large number of countries that use reverse osmosis to obtain drinking water also are producers and exporters of hydrocarbons. This makes seawater RO units particularly susceptible to damage from oil spills. This project is focused on the repercussions of such an incident on the performance of the above-mentioned modules. The study has concentrated on the lower molecular weight hydrocarbons present in contaminated seawater feed as it can be safely assumed that organics of higher molecular weight will have already been dealt by passage through the RO pre-treatment processes. The organic foulants chosen for investigation are: diesel (a likely constituent arising from spillages) and hexane (chosen as a model low-molecular-weight hydrocarbon). The study has investigated the effects of the presence of these contaminants in both water-soluble and emulsion form. The membranes tested are brackish water membranes and seawater membranes of different structures polyamide based and CTA (cellulose triacetate). These membranes were tested in saline water mainly at the salinity, 5500 ppm NaCl. The performance of the RO unit, in terms of salt passage and permeate flux through the membranes, were assessed before and after fouling. These results have been correlated with microscopic examinations of the surface of the membranes. Substantially different effects of exposure to hydrocarbons have been monitored between different membranes and also in terms of the active and support layers of a particular membrane

Pension plan asset valuation

Various asset valuation methods are used in the context of funding valuations. The motivation for such methods and their properties are briefly described. Some smoothed value or market-related methods based on arithmetic averaging and exponential smoothing are considered and their effect on funding is discussed. Suggestions for further research are also made

Tail risk in pension funds: An analysis using ARCH models and bilinear processes

Pension funding rules and practice contain implicit smoothing and counter-cyclical mechanisms. We set up a stylized model to investigate whether this may give rise to tail risk, in the form of large but rare losses, when pension liabilities are imperfectly but optimally hedged by pension fund assets. We find that pension losses follow a nonlinear dynamic process, and we derive a complete description of the stochastic properties of this process using Markov chain and bilinear stochastic process theory. The resulting pension dynamics resembles that of a modified ARCH model, which suggests that bursts in volatility may occur, and tail risk may be present. Simulations confirm that pension losses exhibit skewness, leptokurtosis and heavy tails, specially when cash flow smoothing is pronounced. Regulators and investors should be aware of the total amount of smoothing in pension funds as this may contribute to extreme losses, which may adversely affect the security of employee benefits as well as the valuation of firms with corporate pension plans

Efficient Gain and Loss Amortization and Optimal Funding in Pension Plans

The authors consider efficient methods of amortizing actuarial gains and losses in defined-benefit pension plans. In the context of a simple model where asset gains and losses emerge as a consequence of random (independent and identically distributed) rates of investment return, it has been shown that direct amortization of such gains and losses leads to more variable funding levels and contribution rates, compared with an indirect and proportional form of amortization that “spreads” the gains and losses. Stochastic simulations are performed and they indicate that spreading remains more efficient than amortization with simple AR(1) and MA(1) rates of return. Similar results are obtained when a more comprehensive actuarial stochastic investment model (which includes economic wage inflation) is simulated. Proportional spreading is rationalized as the contribution control that optimizes mean square deviations in the contributions and fund levels when the funding process is Markovian and the fund is invested in two assets (a random risky and a risk-free asset). Efficient spreading and amortization periods are suggested for the United States, the United Kingdom, and Canada

The treatment of assets in pension funding

A recent survey of actuarial practitioners in North America shows that smoothed-market actuarial asset values are commonly used in funding valuations of defined benefit pension plans. Four methods of calculating such values are reported in the actuarial literature but only qualitative descriptions of the methods are given. This paper provides mathematical descriptions of the “average of market”, “weighted average”, “deferred recognition” and “write-up” actuarial values. They are shown to be based on either arithmetic or exponential smoothing. Provided the same form of smoothing is used, the four methods are equivalent

Exponential smoothing methods in pension funding

'Smoothed-market' methods are used by actuaries, when they value pension plan assets, in order to dampen the volatility in contribution rates recommended to plan sponsors. A method involving exponential smoothing is considered. The dynamics of the pension funding process is investigated in the context of a simple model where asset gains and losses emerge as a result of random rates of investment return and where the gains and losses are spread. It is shown that smoothing market values up to a point does improve the stability of contributions but excessive smoothing is inefficient. It is also shown that consideration should be given to the combined effect of the asset valuation and gain and loss adjustment methods. Practical and efficient combinations of gain/loss spreading periods and asset value smoothing parameters are suggested