Valuing the Future, Discounting in Random Environments: A Review

We address the process of discounting in random environments which allows to value the far future in economic terms. We review several approaches to the problem regarding different well-established stochastic market dynamics in the continuous-time context and include the Feynman-Kac approach. We also review the relation between bond pricing theory and discount and introduce the market price of risk and the risk neutral measures from an intuitive point of view devoid of excessive formalism. We provide the discount for each economic model and discuss their key results. We finally present a summary of our previous empirical studies on several countries of the long-run discount problem.

Asset Prices and Pandemics: The Effects of Lockdowns

We examine the impact of pandemics on equilibrium in an integrated epidemic-economy model with production. Two types of technologies are considered: a neo-classical technology and one capturing the notion of time-to-produce. The impact of a shelter-in-place policy with and without layoffs is studied. The paper documents adjustments in interest rate, market price of risk, stock market and real wage as the epidemic propagates. It shows the qualitative effects of a shelter-in-place policy in the model are consistent with the patterns displayed by the stock market and real wage during the COVID-19 outbreak. Puzzles emerging from the analysis are outlined.

Implicit incentives for fund managers with partial information

We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. Estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. Therefore, we solve the problem by combining the martingale method and a concavification procedure and we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.

Global Equity Correlation in International Markets

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks. This paper was accepted by Karl Diether, finance.

Calculation procedure of the aggregated value of total risks in the work of the fishing fleet

В статье рассматриваются актуальные вопросы оценки рисков в работе рыбопромыслового флота. Определен состав основных технических и технологических рисков, а также рискообразующих факторов и причин, оказывающих негативное влияние на работу рыбопромыслового флота. Так, в число рискообразующих фактов входят: природные (штормы, ураганы, цунами, низкие температуры), техническое состояние судов, уровень технического оснащения рыболовных судов рыбопоисковой аппаратурой и спутниковыми системами и др. Риски в деятельности рыбопромыслового флота в основном взаимосвязаны. В этой связи при количественной оценке агрегированной величины всех рисков в работе рыболовного флота необходимо учитывать уровень взаимозависимости рисков и их коэффициент корреляции. Предложена методика расчета агрегированной оценки совокупного риска в работе рыбопромыслового флота. Приводится демонстрационный числовой пример практической реализации методики. Отмечается необходимость создания компьютерной программы реализации методики, что позволит выполнять весь комплекс расчетов агрегированных оценок совокупных рисков и эффективности мероприятий по снижению уровня рисков, а также цены риска. The article discusses topical issues of risk assessment in the work of the fishing fleet. The composition of the main technical and technological risks, as well as risk-forming factors and causes, which have a negative impact on the operation of the fishing fleet, has been determined. So, the facts include: natural (storms, hurricanes, tsunamis, low temperatures), the technical condition of ships, the level of technical equipment of fishing vessels with fish-finding equipment and satellite systems. The risks in the activities of the fishing fleet are mainly interrelated. In this regard, when quantifying the aggregate value of all risks in the operation of the fishing fleet, it is necessary to take into account the level of interdependence of risks and their correlation coefficient. A method for calculating the aggregate assessment of the total risk in the operation of the fishing fleet is proposed. A demo numerical example of the practical implementation of the technique is given. The need to create a computer program for the implementation of the methodology is noted, which will allow performing the whole complex of calculations of aggregated assessments of total risks and the effectiveness of measures to reduce the level of risks, as well as the price of risk.

Re-evaluating the risk costing agenda in PPP projects

PurposeThe level at which risk is priced and the magnitude of risks transferred to the private sector will have a significant impact on the cost of the public–private partnership (PPP) deals as well as on the value for money analysis and on the section of the optimum investment options. The price of risk associated with PPP schemes is complex, dynamic and continuous throughout the concession agreement. Risk allocation needs to be re-evaluated to ensure the optimum outcome of the PPP contract.Design/methodology/approachThis paper provides a coherent theoretical framework for dealing with scenarios of potential gain and loss from retaining or transferring risks.FindingsThe outcome indicates that using the proposed framework will provide innovative ways of deriving risk prices in PPP projects using several risk determinants strategies.Practical implicationsIn costing risks, analysts have to take into consideration the balance between the cost of risk transfer and the cost of losses if risk is retained.Originality/valueThis paper contributes to the PPP literature and practice by proposing a framework which is consistent with a risk allocation approach in PPP projects, where the key proposition is that risk pricing can overload project debt leading to loss of value.