Arbitrage Pricing of Multi-person Game Contingent Claims

We introduce a class of financial contracts involving several parties by extending the notion of a two-person game option (see Kifer (2000)) to a contract in which an arbitrary number of parties is involved and each of them is allowed to make a wide array of decisions at any time, not restricted to simply `exercising the option'. The collection of decisions by all parties then determines the contract's settlement date as well as the terminal payoff for each party. We provide sufficient conditions under which a multi-person game option has a unique arbitrage price, which is additive with respect to any partition of the contract

BSDEs driven by a multi-dimensional martingale and their applications to market models with funding costs

We establish some well-posedness and comparison results for BSDEs driven by one- and multi-dimensional martingales. On the one hand, our approach is largely motivated by results and methods developed in Carbone et al. (2008) and El Karoui and Huang (1997). On the other hand, our results are also motivated by the recent developments in arbitrage pricing theory under funding costs and collateralization. A new version of the comparison theorem for BSDEs driven by a multi-dimensional martingale is established and applied to the pricing and hedging BSDEs studied in Bielecki and Rutkowski (2014) and Nie and Rutkowski (2014). This allows us to obtain the existence and uniqueness results for unilateral prices and to demonstrate the existence of no-arbitrage bounds for a collateralized contract when both agents have non-negative initial endowments

The Quest for Pension Reform: Poland's Security though Diversity

All over the world, pension systems have financing difficulties that need to be addressed. There are three ways of dealing with pension systems problems, namely subsidisation, rationalisation and reforming. Opposite to the first two, the latter one means a deep change of system fundamentals. The new system is a way of income allocation over life cycle. The system is entirely based on individual accounts. Individuals have two accounts each. At the day of retirement amounts accumulated in each of the accounts are annualised. Pensions depend on two factors: (a) accumulated capital, and (b) age of retirement. Such old-age pension system provides its participants with high security thanks to diversification of risk between two markets, namely the labour market and the capital market, and full link between contributions and benefits. Minimum guarantee is financed by the state budget. The new system is less exposed to typical problems of that markets. Additionally, it is more resistant to political pressures. Additionally, the new system is expected to create the following externalities: change of savings structure in favour of long term savings, less incentive for early retirement, and less incentive for hiding income. The old Polish old-age system was terminated on 31 December 1998 - a new one called "Security through Diversity" was introduced on 1 January 1999. The new system covers people up to 50. The most important feature of the new system is its separation within social security. In particular, a separate contribution is paid for old-age. One part (5/8) of that contribution goes to a notional defined contribution 1st pillar individual account, the other part (3/8) goes to fully funded 2nd pillar individual account. Both elements of the system work along defined contribution regime. People between 30 and 50 have an option to pay entire contribution to 1st pillar individual account, people below 30 have their old age contributions automatically divided between the accounts.http://deepblue.lib.umich.edu/bitstream/2027.42/39670/3/wp286.pd

The quest for pension reform : Poland's security through diversity

This report looks at pension reform recently undertaken in Poland, but draws conclusions with wider applicability. It examines the motivation for reform, the struggle of progressively minded experts and politicians to advance the reform agenda, the architecture of the new system, and issues arising during the transition. The final section offers tentative conclusions and lessons for other countries while highlighting the factors leading to the reform's successful launch (it is too early yet to determine the pension system's success). Factors included enlisting broad popular support for the contents of the reform package; shielding the office for pension reform from political fights, enabling it to focus on its professional tasks; intimately involving the trade unions through several consultations; and lastly, moving quickly to grasp opportunities, that is, taking advantage of the public consensus for pension reform.Environmental Economics&Policies,Pensions&Retirement Systems,Economic Theory&Research,Banks&Banking Reform,Information Technology

Valuation and Hedging of Contracts with Funding Costs and Collateralization

The research presented in this work is motivated by recent papers by Brigo et al. (2011), Burgard and Kjaer (2009), Cr\'epey (2012), Fujii and Takahashi (2010), Piterbarg (2010) and Pallavicini et al. (2012). Our goal is to provide a sound theoretical underpinning for some results presented in these papers by developing a unified framework for the non-linear approach to hedging and pricing of OTC financial contracts. We introduce a systematic approach to valuation and hedging in nonlinear markets, that is, in markets where cash flows of the financial contracts may depend on the hedging strategies. Our systematic approach allows to identify primary sources of and quantify various adjustment to valuation and hedging, primarily the funding and liquidity adjustment and credit risk adjustment. We propose a way to define no-arbitrage in such nonlinear markets, and we provide conditions that imply absence of arbitrage in some specific market trading models. Accordingly, we formulate a concept of no-arbitrage price, and we provide relevant (non-linear) BSDE that produces the no-arbitrage price in case when the contract's cash flows can be replicated