A MIXED BOND AND EQUITY FUND MODEL FOR THE VALUATION OF VARIABLE ANNUITIES

2020 ◽  
pp. 1-29
Author(s):  
Maciej Augustyniak ◽  
Frédéric Godin ◽  
Emmanuel Hamel
Keyword(s):  
Yield Curve ◽  
Fixed Income ◽  
Equity Fund ◽  
Basis Risk ◽  
Substantial Impact ◽  
Equity Funds ◽  
Rate Environment ◽  
Portfolio Return ◽  
Fund Return

Abstract Variable annuity (VA) policies are typically issued on mutual funds invested in both fixed income and equity asset classes. However, due to the lack of specialized models to represent the dynamics of fixed income fund returns, the literature has primarily focused on studying long-term investment guarantees on single-asset equity funds. This article develops a mixed bond and equity fund model in which the fund return is linked to movements of the yield curve. Theoretical motivation for our proposed specification is provided through an analogy with a portfolio of rolling horizon bonds. Moreover, basis risk between the portfolio return and its risk drivers is naturally incorporated into our framework. Numerical results show that the fit of our model to Canadian VA data is adequate. Finally, the valuation of VAs is illustrated and it is found that the prevailing interest rate environment can have a substantial impact on guarantee costs.

scholarly journals Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement

2021 ◽  
Author(s):  
Jens H. E. Christensen ◽  
Jose A. Lopez ◽  
Paul L. Mussche
Keyword(s):  
Financial Risk ◽  
Stress Testing ◽  
Yield Curve ◽  
Interest Rate Risk ◽  
Insurance Companies ◽  
Fixed Income ◽  
Bond Yields ◽  
Simple Tool ◽  
Interest Rate Risk Management

Insurance companies and pension funds have liabilities far into the future and typically well beyond the longest maturity bonds trading in fixed-income markets. Such long-lived liabilities still need to be discounted, and yield curve extrapolations based on the information in observed yields can be used. We use dynamic Nelson-Siegel (DNS) yield curve models to extrapolate risk-free yield curves for Switzerland and several countries. We find slight biases in extrapolated long bond yields of just a few basis points. In addition, the DNS model allows the generation of useful financial risk metrics, such as ranges of possible yield outcomes over projection horizons commonly used for stress-testing purposes. Therefore, we recommend using DNS models as a simple tool for generating extrapolated yields for long-term interest rate risk management. This paper was accepted by Kay Giesecke, finance.

scholarly journals HOUSING FINANCE: IMPACT OF HEAVY INTEREST INCOME TAX

2021 ◽  
Vol 6 (2) ◽  
pp. 102-124
Author(s):  
Igor Semenenko ◽  
Jun Wook Yoo
Keyword(s):  
Real Estate ◽  
Jel Classification ◽  
Fixed Income ◽  
Property Prices ◽  
Interest Income ◽  
Level Data ◽  
Retail Investors ◽  
Real Estate Investments ◽  
Rate Environment

Heavy taxation of interest income becomes a structural driver of property prices in a low-interest-rate environment. Inflation-adjusted price appreciation in 1996-2017 is approximately 200 basis points higher in 14 countries allowing no exemptions on interest income than in 37 countries that tax interest income at favorable rates or provide exemptions. Results for average returns over long-term periods are confirmed in models with annual frequencies, city-level data, and in a sample of 39 OECD countries for which price/rent ratios are available. It appears that investors view direct real estate, a heavily tax-favored asset, as an inflation hedge and/or alternative to fixed income asset. Higher interest income taxation may be fueling demand for direct real estate investments by retail investors. Separately, my empirical findings suggest that easy monetary policy effects can be magnified through the housing channel in countries that do not allow exemptions on interest income. Consequently, we should expect larger investment misallocations due to asset prices departure from fundamentals in some geographies. JEL Classification Codes: E3, E4, F3, G1, G5, H2.

scholarly journals Robust long-term interest rate risk hedging in incomplete bond markets

2020 ◽  
pp. 1-28
Author(s):  
Sally Shen ◽  
Antoon Pelsser ◽  
Peter Schotman
Keyword(s):  
Yield Curve ◽  
Interest Rate Risk ◽  
Bond Markets ◽  
Risk Hedging ◽  
Hedging Portfolio ◽  
Robust Least Squares ◽  
Rate Environment ◽  
Market Consistent Valuation ◽  
Pension Liabilities

Abstract Pricing ultra-long-dated pension liabilities under the market-consistent valuation is challenged by the scarcity of the long-term market instruments that match or exceed the terms of pension liabilities. We develop a robust self-financing hedging strategy which adopts a min–max expected shortfall hedging criterion to replicate the long-dated liabilities for agents who fear parameter misspecification. We introduce a backward robust least squares Monte Carlo method to solve this dynamic robust optimization problem. We find that both naive and robust optimal portfolios depend on the hedging horizon and the current funding ratio. The robust policy suggests taking more risk when the current funding ratio is low. The yield curve constructed by the robust dynamic hedging portfolio is always lower than the naive one but is higher than the model-based yield curve in a low-rate environment.

A Note Concerning the Dynamics of Government Bond Yields

2021 ◽  
pp. 056943452098827
Author(s):  
Tanweer Akram
Keyword(s):  
Interest Rate ◽  
Financial Markets ◽  
Yield Curve ◽  
Empirical Studies ◽  
State Theory ◽  
Government Bond ◽  
Bond Yields ◽  
Short Term ◽  
Government Bonds

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

scholarly journals Liquidity-Adjusted Benchmark Yield Curves: A Look at Trading Concentration and Information

2007 ◽  
Vol 10 (04) ◽  
pp. 491-518 ◽  
Author(s):  
William T. Lin ◽  
David S. Sun
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Information Discovery ◽  
Affine Term Structure ◽  
Term Structure Model ◽  
Long Run ◽  
Fitting Method ◽  
Bond Issues ◽  
Short Run

Estimation of benchmark yield curve in developing markets is often influenced by liquidity concentration. Based on an affine term structure model, we develop a long run liquidity weighted fitting method to address the trading concentration phenomenon arising from horizon-induced clientele equilibrium as well as information discovery. Specifically, we employ arguments from models of liquidity concentration and benchmark security information. After examining time series behavior of price errors against our fitted model, we find results consistent with both the horizon and information hypotheses. Our evidence indicates that trading liquidity carries information effect in the long run, which cannot be fully captured in the short run. Trading liquidity plays a key role in long run term structure fitting. Markets for liquid benchmark government bond issues collectively form a long term equilibrium. Compared with previous studies, our results provide a robust and realistic characterization of the spot rate term structure and related price forecasting over time, which in turn help portfolio investment of fixed income and long run pricing of financial instruments.

A Practical Robust Long-Term Yield Curve Model

2018 ◽  
pp. 273-314 ◽  
Author(s):  
M. A. H. Dempster ◽  
Elena A. Medova ◽  
Igor Osmolovskiy ◽  
Philipp Ustinov
Keyword(s):  
Yield Curve ◽  
Curve Model

scholarly journals Biased Decision-Making and Liquidity Buffer in Commercial Banking

2018 ◽  
Vol 5 (2) ◽  
pp. 84
Author(s):  
Mingyuan Sun
Keyword(s):  
Term Structure ◽  
Reference Point ◽  
Yield Curve ◽  
Risk Preference ◽  
Framing Effect ◽  
Portfolio Allocation ◽  
Commercial Banking ◽  
Bank Run ◽  
Liquidation Cost

Few derived versions based on the classic bank run model have taken into account the framing effect of general lenders. The purpose of this study is to revisit the issue and discuss a model of bank run equilibrium combined with biased risk preference, which is applied to analyze how portfolio allocation and liquidity buffer in commercial banks are affected by liquidation cost and the reference point. The results suggest the condition on which the liquidity buffer of a particular bank should provide. Liquidation cost is positively correlated with the lower bound of liquidity buffer. The effect of the reference point on liquidity buffer partially depends on the slope of yield curve term structure. Higher reference point could typically cause a lower portion of long-term investment.

scholarly journals The hygiene hypothesis, the COVID pandemic, and consequences for the human microbiome

2021 ◽  
Vol 118 (6) ◽  
pp. e2010217118
Author(s):  
B. Brett Finlay ◽  
Katherine R. Amato ◽  
Meghan Azad ◽  
Martin J. Blaser ◽  
Thomas C. G. Bosch ◽  
...  
Keyword(s):  
Human Health ◽  
Human Microbiome ◽  
Risk Groups ◽  
Hygiene Hypothesis ◽  
Control Measures ◽  
Prevention Measures ◽  
Long Term Effects ◽  
Substantial Impact ◽  
Future Challenges

The COVID-19 pandemic has the potential to affect the human microbiome in infected and uninfected individuals, having a substantial impact on human health over the long term. This pandemic intersects with a decades-long decline in microbial diversity and ancestral microbes due to hygiene, antibiotics, and urban living (the hygiene hypothesis). High-risk groups succumbing to COVID-19 include those with preexisting conditions, such as diabetes and obesity, which are also associated with microbiome abnormalities. Current pandemic control measures and practices will have broad, uneven, and potentially long-term effects for the human microbiome across the planet, given the implementation of physical separation, extensive hygiene, travel barriers, and other measures that influence overall microbial loss and inability for reinoculation. Although much remains uncertain or unknown about the virus and its consequences, implementing pandemic control practices could significantly affect the microbiome. In this Perspective, we explore many facets of COVID-19−induced societal changes and their possible effects on the microbiome, and discuss current and future challenges regarding the interplay between this pandemic and the microbiome. Recent recognition of the microbiome’s influence on human health makes it critical to consider both how the microbiome, shaped by biosocial processes, affects susceptibility to the coronavirus and, conversely, how COVID-19 disease and prevention measures may affect the microbiome. This knowledge may prove key in prevention and treatment, and long-term biological and social outcomes of this pandemic.

Riding the Yield Curve: Risk Taking Behavior in a Low Interest Rate Environment

2020 ◽  
Author(s):  
Ralph Chami ◽  
Thomas Cosimano ◽  
Céline Rochon ◽  
Julieta Yung
Keyword(s):  
Interest Rate ◽  
Risk Taking ◽  
Yield Curve ◽  
Rate Environment ◽  
Risk Taking Behavior
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