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Risks, Volume 2, Issue 2 (June 2014), Pages 89-248

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Research

Open AccessArticle Initial Investigations of Intra-Day News Flow of S&P500 Constituents
Risks 2014, 2(2), 89-102; doi:10.3390/risks2020089
Received: 1 November 2013 / Revised: 23 January 2014 / Accepted: 5 March 2014 / Published: 1 April 2014
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Abstract
In this work, we examine Thomas Reuters News Analytics (TRNA) data. We found several fascinating discoveries. First, we document the phenomenon that we label “Jam-the-Close”: The last half hour of trading (15:30 to 16:00 EST) contains a substantial and statistically significant amount [...] Read more.
In this work, we examine Thomas Reuters News Analytics (TRNA) data. We found several fascinating discoveries. First, we document the phenomenon that we label “Jam-the-Close”: The last half hour of trading (15:30 to 16:00 EST) contains a substantial and statistically significant amount of news sentiment releases. This finding is robust across years and months of the year. Next, upon further investigations we found that the “novelty” score is on average 0.67 in this period vs. 2.09 prior to midday. This indicates that “new” news is flowing at a rapid pace prior to the close. Finally, we discuss the implication of such phenomena in the context of existing financial literature. Full article
Open AccessArticle 1980–2008: The Illusion of the Perpetual Money Machine and What It Bodes for the Future
Risks 2014, 2(2), 103-131; doi:10.3390/risks2020103
Received: 10 January 2014 / Accepted: 20 February 2014 / Published: 1 April 2014
Cited by 9 | PDF Full-text (891 KB) | HTML Full-text | XML Full-text
Abstract
We argue that the present crisis and stalling economy that have been ongoing since 2007 are rooted in the delusionary belief in policies based on a “perpetual money machine” type of thinking. We document strong evidence that, since the early 1980s, consumption [...] Read more.
We argue that the present crisis and stalling economy that have been ongoing since 2007 are rooted in the delusionary belief in policies based on a “perpetual money machine” type of thinking. We document strong evidence that, since the early 1980s, consumption has been increasingly funded by smaller savings, booming financial profits, wealth extracted from house price appreciation and explosive debt. This is in stark contrast with the productivity-fueled growth that was seen in the 1950s and 1960s. We describe the transition, in gestation in the 1970s, towards the regime of the “illusion of the perpetual money machine”, which started at full speed in the early 1980s and developed until 2008. This regime was further supported by a climate of deregulation and a massive growth in financial derivatives designed to spread and diversify the risks globally. The result has been a succession of bubbles and crashes, including the worldwide stock market bubble and great crash of October 1987, the savings and loans crisis of the 1980s, the burst in 1991 of the enormous Japanese real estate and stock market bubbles, the emerging markets bubbles and crashes in 1994 and 1997, the Long-Term Capital Management (LTCM) crisis of 1998, the dotcom bubble bursting in 2000, the recent house price bubbles, the financialization bubble via special investment vehicles, the stock market bubble, the commodity and oil bubbles and the current debt bubble, all developing jointly and feeding on each other until 2008. This situation may be further aggravated in the next decade by an increase in financialization, through exchange-traded-funds (ETFs), speed and automation, through algorithmic trading and public debt, and through growing unfunded liabilities. We conclude that, to get out of this catch 22 situation, we should better manage and understand the incentive structures in our society, we need to focus our efforts on our real economy and we have to respect and master the art of planning and prediction. Only gradual change, with a clear long term planning, can steer our financial and economic system from the turbulence associated with the perpetual money machine to calmer and more sustainable waters. Full article
Open AccessArticle Effectively Tackling Reinsurance Problems by Using Evolutionary and Swarm Intelligence Algorithms
Risks 2014, 2(2), 132-145; doi:10.3390/risks2020132
Received: 15 January 2014 / Revised: 28 February 2014 / Accepted: 3 March 2014 / Published: 1 April 2014
Cited by 2 | PDF Full-text (352 KB) | HTML Full-text | XML Full-text
Abstract
This paper is focused on solving different hard optimization problems that arise in the field of insurance and, more specifically, in reinsurance problems. In this area, the complexity of the models and assumptions considered in the definition of the reinsurance rules and [...] Read more.
This paper is focused on solving different hard optimization problems that arise in the field of insurance and, more specifically, in reinsurance problems. In this area, the complexity of the models and assumptions considered in the definition of the reinsurance rules and conditions produces hard black-box optimization problems (problems in which the objective function does not have an algebraic expression, but it is the output of a system (usually a computer program)), which must be solved in order to obtain the optimal output of the reinsurance. The application of traditional optimization approaches is not possible in this kind of mathematical problem, so new computational paradigms must be applied to solve these problems. In this paper, we show the performance of two evolutionary and swarm intelligence techniques (evolutionary programming and particle swarm optimization). We provide an analysis in three black-box optimization problems in reinsurance, where the proposed approaches exhibit an excellent behavior, finding the optimal solution within a fraction of the computational cost used by inspection or enumeration methods. Full article
Open AccessArticle Attracting Health Insurance Buyers through Selective Contracting: Results of a Discrete-Choice Experiment among Users of Hospital Services in the Netherlands
Risks 2014, 2(2), 146-170; doi:10.3390/risks2020146
Received: 22 October 2013 / Revised: 31 March 2014 / Accepted: 2 April 2014 / Published: 15 April 2014
Cited by 4 | PDF Full-text (705 KB) | HTML Full-text | XML Full-text
Abstract
In 2006, the Netherlands commenced market based reforms in its health care system. The reforms included selective contracting of health care providers by health insurers. This paper focuses on how health insurers may increase their market share on the health insurance market [...] Read more.
In 2006, the Netherlands commenced market based reforms in its health care system. The reforms included selective contracting of health care providers by health insurers. This paper focuses on how health insurers may increase their market share on the health insurance market through selective contracting of health care providers. Selective contracting is studied by eliciting the preferences of health care consumers for attributes of health care services that an insurer could negotiate on behalf of its clients with health care providers. Selective contracting may provide incentives for health care providers to deliver the quality that consumers need and demand. Selective contracting also enables health insurers to steer individual patients towards selected health care providers. We used a stated preference technique known as a discrete choice experiment to collect and analyze the data. Results indicate that consumers care about both costs and quality of care, with healthy consumers placing greater emphasis on costs and consumers with poorer health placing greater emphasis on quality of care. It is possible for an insurer to satisfy both of these criteria by selective contracting health care providers who consequently purchase health care that is both efficient and of good quality. Full article
Open AccessArticle Optimal Consumption and Investment with Labor Income and European/American Capital Guarantee
Risks 2014, 2(2), 171-194; doi:10.3390/risks2020171
Received: 10 March 2014 / Revised: 5 May 2014 / Accepted: 7 May 2014 / Published: 16 May 2014
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Abstract
We present the optimal consumption and investment strategy for an investor, endowed with labor income, searching to maximize utility from consumption and terminal wealth when facing a binding capital constraint of a European (constraint on terminal wealth) or an American (constraint on [...] Read more.
We present the optimal consumption and investment strategy for an investor, endowed with labor income, searching to maximize utility from consumption and terminal wealth when facing a binding capital constraint of a European (constraint on terminal wealth) or an American (constraint on the wealth process) type. In both cases, the optimal strategy is proven to be of the option-based portfolio insurance type. The optimal strategy combines a long position in the optimal unrestricted allocation with a put option. In the American case, where the investor is restricted to fulfill a capital guarantee at every intermediate time point over the interval of optimization, we prove that the investor optimally changes his budget constraint for the unrestricted allocation whenever the constraint is active. The strategy is explained in a step-by-step manner, and numerical illustrations are presented in order to support intuition and to compare the restricted optimal strategy with the unrestricted optimal counterpart. Full article
Open AccessArticle Neumann Series on the Recursive Moments of Copula-Dependent Aggregate Discounted Claims
Risks 2014, 2(2), 195-210; doi:10.3390/risks2020195
Received: 1 November 2013 / Revised: 10 April 2014 / Accepted: 16 May 2014 / Published: 27 May 2014
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Abstract
We study the recursive moments of aggregate discounted claims, where the dependence between the inter-claim time and the subsequent claim size is considered. Using the general expression for the m-th order moment proposed by Léveillé and Garrido (Scand. Actuar. J. 2001, [...] Read more.
We study the recursive moments of aggregate discounted claims, where the dependence between the inter-claim time and the subsequent claim size is considered. Using the general expression for the m-th order moment proposed by Léveillé and Garrido (Scand. Actuar. J. 2001, 2, 98–110), which takes the form of the Volterra integral equation (VIE), we used the method of successive approximation to derive the Neumann series of the recursive moments. We then compute the first two moments of aggregate discounted claims, i.e., its mean and variance, based on the Neumann series expression, where the dependence structure is captured by a Farlie–Gumbel–Morgenstern (FGM) copula, a Gaussian copula and a Gumbel copula with exponential marginal distributions. Insurance premium calculations with their figures are also illustrated. Full article
(This article belongs to the Special Issue Application of Stochastic Processes in Insurance)
Open AccessArticle When the U.S. Stock Market Becomes Extreme?
Risks 2014, 2(2), 211-225; doi:10.3390/risks2020211
Received: 5 March 2014 / Revised: 5 May 2014 / Accepted: 13 May 2014 / Published: 28 May 2014
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Abstract
Over the last three decades, the world economy has been facing stock market crashes, currency crisis, the dot-com and real estate bubble burst, credit crunch and banking panics. As a response, extreme value theory (EVT) provides a set of ready-made approaches to [...] Read more.
Over the last three decades, the world economy has been facing stock market crashes, currency crisis, the dot-com and real estate bubble burst, credit crunch and banking panics. As a response, extreme value theory (EVT) provides a set of ready-made approaches to risk management analysis. However, EVT is usually applied to standardized returns to offer more reliable results, but remains difficult to interpret in the real world. This paper proposes a quantile regression to transform standardized returns into theoretical raw returns making them economically interpretable. An empirical test is carried out on the S&P500 stock index from 1950 to 2013. The main results indicate that the U.S stock market becomes extreme from a price variation of ±1.5% and the largest one-day decline of the 2007–2008 period is likely, on average, to be exceeded one every 27 years. Full article
(This article belongs to the Special Issue Risk Management Techniques for Catastrophic and Heavy-Tailed Risks)
Open AccessArticle Demand of Insurance under the Cost-of-Capital Premium Calculation Principle
Risks 2014, 2(2), 226-248; doi:10.3390/risks2020226
Received: 11 March 2014 / Revised: 28 May 2014 / Accepted: 4 June 2014 / Published: 17 June 2014
Cited by 1 | PDF Full-text (1351 KB) | HTML Full-text | XML Full-text
Abstract
We study the optimal insurance design problem. This is a risk sharing problem between an insured and an insurer. The main novelty in this paper is that we study this optimization problem under a risk-adjusted premium calculation principle for the insurance cover. [...] Read more.
We study the optimal insurance design problem. This is a risk sharing problem between an insured and an insurer. The main novelty in this paper is that we study this optimization problem under a risk-adjusted premium calculation principle for the insurance cover. This risk-adjusted premium calculation principle uses the cost-of-capital approach as it is suggested (and used) by the regulator and the insurance industry. Full article

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