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Risks, Volume 7, Issue 4 (December 2019)

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Open AccessArticle
Volatility Timing in CPF Investment Funds in Singapore: Do They Outperform Non-CPF Funds?
Risks 2019, 7(4), 106; https://doi.org/10.3390/risks7040106 - 20 Oct 2019
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Abstract
The purpose of this study is to examine the volatility-timing performance of Singapore-based funds under the Central Provident Fund (CPF) Investment Scheme and non-CPF linked funds by taking into account the currency risk effect on internationally managed funds. In particular, we empirically assess [...] Read more.
The purpose of this study is to examine the volatility-timing performance of Singapore-based funds under the Central Provident Fund (CPF) Investment Scheme and non-CPF linked funds by taking into account the currency risk effect on internationally managed funds. In particular, we empirically assess whether the funds under the CPF Investment Scheme outperform non-CPF funds by examining the volatility-timing performance associated with these funds. The volatility-timing ability of CPF funds will provide the CPF board with a new method for risk classification. We employ the GARCH models and modified factor models to capture the response of funds to market abnormal conditional volatility including the weekday effect. The SMB and HML factors for non-US based funds are constructed from stock market data to exclude the contribution of the size effect and the BE/ME effect. The results show that volatility timing is one of the factors contributing to the excess return of funds. However, funds’ volatility-timing seems to be country-specific. Most of the Japanese equity funds and global equity funds under the CPF Investment Scheme are found to have the ability of volatility timing. This finding contrasts with the existing studies on Asian, ex-Japan funds and Greater China funds. Moreover, there is no evidence that funds under the CPF Investment Scheme show a better group performance of volatility timing. Full article
(This article belongs to the Special Issue Measuring and Modelling Financial Risk and Derivatives)
Open AccessArticle
Three Essays on Stopping
Risks 2019, 7(4), 105; https://doi.org/10.3390/risks7040105 - 18 Oct 2019
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Abstract
First, we give a closed-form formula for first passage time of a reflected Brownian motion with drift. This corrects a formula by Perry et al. (2004). Second, we show that the maximum before a fixed drawdown is exponentially distributed for any drawdown, if [...] Read more.
First, we give a closed-form formula for first passage time of a reflected Brownian motion with drift. This corrects a formula by Perry et al. (2004). Second, we show that the maximum before a fixed drawdown is exponentially distributed for any drawdown, if and only if the diffusion characteristic μ / σ 2 is constant. This complements the sufficient condition formulated by Lehoczky (1977). Third, we give an alternative proof for the fact that the maximum before a fixed drawdown is exponentially distributed for any spectrally negative Lévy process, a result due to Mijatović and Pistorius (2012). Our proof is similar, but simpler than Lehoczky (1977) or Landriault et al. (2017). Full article
Open AccessFeature PaperArticle
Ruin Probability Approximations in Sparre Andersen Models with Completely Monotone Claims
Risks 2019, 7(4), 104; https://doi.org/10.3390/risks7040104 - 14 Oct 2019
Viewed by 150
Abstract
We consider the Sparre Andersen risk process with interclaim times that belong to the class of distributions with rational Laplace transform. We construct error bounds for the ruin probability based on the Pollaczek–Khintchine formula, and develop an efficient algorithm to approximate the ruin [...] Read more.
We consider the Sparre Andersen risk process with interclaim times that belong to the class of distributions with rational Laplace transform. We construct error bounds for the ruin probability based on the Pollaczek–Khintchine formula, and develop an efficient algorithm to approximate the ruin probability for completely monotone claim size distributions. Our algorithm improves earlier results and can be tailored towards achieving a predetermined accuracy of the approximation. Full article
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Open AccessArticle
A Generalised CIR Process with Externally-Exciting and Self-Exciting Jumps and Its Applications in Insurance and Finance
Risks 2019, 7(4), 103; https://doi.org/10.3390/risks7040103 - 14 Oct 2019
Viewed by 114
Abstract
In this paper, we study a generalised CIR process with externally-exciting and self-exciting jumps, and focus on the distributional properties and applications of this process and its aggregated process. The aim of the paper is to introduce a more general process that includes [...] Read more.
In this paper, we study a generalised CIR process with externally-exciting and self-exciting jumps, and focus on the distributional properties and applications of this process and its aggregated process. The aim of the paper is to introduce a more general process that includes many models in the literature with self-exciting and external-exciting jumps. The first and second moments of this jump-diffusion process are used to calculate the insurance premium based on mean-variance principle. The Laplace transform of aggregated process is derived, and this leads to an application for pricing default-free bonds which could capture the impacts of both exogenous and endogenous shocks. Illustrative numerical examples and comparisons with other models are also provided. Full article
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Open AccessFeature PaperArticle
Claim Watching and Individual Claims Reserving Using Classification and Regression Trees
Risks 2019, 7(4), 102; https://doi.org/10.3390/risks7040102 - 12 Oct 2019
Viewed by 197
Abstract
We present an approach to individual claims reserving and claim watching in general insurance based on classification and regression trees (CART). We propose a compound model consisting of a frequency section, for the prediction of events concerning reported claims, and a severity section, [...] Read more.
We present an approach to individual claims reserving and claim watching in general insurance based on classification and regression trees (CART). We propose a compound model consisting of a frequency section, for the prediction of events concerning reported claims, and a severity section, for the prediction of paid and reserved amounts. The formal structure of the model is based on a set of probabilistic assumptions which allow the provision of sound statistical meaning to the results provided by the CART algorithms. The multiperiod predictions required for claims reserving estimations are obtained by compounding one-period predictions through a simulation procedure. The resulting dynamic model allows the joint modeling of the case reserves, which usually yields useful predictive information. The model also allows predictions under a double-claim regime, i.e., when two different types of compensation can be required by the same claim. Several explicit numerical examples are provided using motor insurance data. For a large claims portfolio we derive an aggregate reserve estimate obtained as the sum of individual reserve estimates and we compare the result with the classical chain-ladder estimate. Backtesting exercises are also proposed concerning event predictions and claim-reserve estimates. Full article
(This article belongs to the Special Issue Claim Models: Granular Forms and Machine Learning Forms)
Open AccessArticle
A Study on Global Investors’ Criteria for Investment in the Local Currency Bond Markets Using AHP Methods: The Case of the Republic of Korea
Risks 2019, 7(4), 101; https://doi.org/10.3390/risks7040101 - 01 Oct 2019
Viewed by 193
Abstract
Global investors’ investment in local currency bonds, especially Korea Treasury Bonds, has increased significantly since the mid-2000s, and their influence on bonds and financial markets has grown consistently. In this paper, we investigate global investor’s priority of decision factors in investing in Korea [...] Read more.
Global investors’ investment in local currency bonds, especially Korea Treasury Bonds, has increased significantly since the mid-2000s, and their influence on bonds and financial markets has grown consistently. In this paper, we investigate global investor’s priority of decision factors in investing in Korea Treasury Bonds by distributing a pairwise comparative survey to experts and analyzing the results using the analytical hierarchy process technique. For analysis, we created model frames with experts in the field of investment based on literature analysis, selected survey participants by considering their institution of their employment, work experience and region, and obtained responses. We find that investors with short-term investment propensities are more sensitive to international and domestic factors and less to risk factors, and more heavily influenced by U.S. dollar funding conditions. On the other hand, investors with long-term investment tendencies are found to be more sensitive to international and risk factors as opposed to domestic factors, and influenced by: global policy rate decisions and fiscal soundness, sovereign credit rating, possible global economic recession, and geographical risks. Our findings not only contribute to enhancing investors’ understanding of the Korean bond market by discussing consensus among investors, but also provide policy implications for Korean government policymakers who need stable and sustained funding. Full article
(This article belongs to the Special Issue Measuring and Modelling Financial Risk and Derivatives)
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Open AccessArticle
Credit Valuation Adjustment Compression by Genetic Optimization
Risks 2019, 7(4), 100; https://doi.org/10.3390/risks7040100 - 29 Sep 2019
Viewed by 197
Abstract
Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. [...] Read more.
Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. They reflect market inefficiencies that should be compressed as much as possible. In this work, we present a genetic algorithm applied to the compression of credit valuation adjustment (CVA), the expected cost of client defaults to a bank. The design of the algorithm is fine-tuned to the hybrid structure, both discrete and continuous parameter, of the corresponding high-dimensional and nonconvex optimization problem. To make intensive trade incremental XVA computations practical in real-time as required for XVA compression purposes, we propose an approach that circumvents portfolio revaluation at the cost of disk memory, storing the portfolio exposure of the night so that the exposure of the portfolio augmented by a new deal can be obtained at the cost of computing the exposure of the new deal only. This is illustrated by a CVA compression case study on real swap portfolios. Full article
(This article belongs to the Special Issue Advances in Credit Risk Modeling and Management)
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Open AccessArticle
A New Heavy Tailed Class of Distributions Which Includes the Pareto
Risks 2019, 7(4), 99; https://doi.org/10.3390/risks7040099 - 20 Sep 2019
Viewed by 246
Abstract
In this paper, a new heavy-tailed distribution, the mixture Pareto-loggamma distribution, derived through an exponential transformation of the generalized Lindley distribution is introduced. The resulting model is expressed as a convex sum of the classical Pareto and a special case of the loggamma [...] Read more.
In this paper, a new heavy-tailed distribution, the mixture Pareto-loggamma distribution, derived through an exponential transformation of the generalized Lindley distribution is introduced. The resulting model is expressed as a convex sum of the classical Pareto and a special case of the loggamma distribution. A comprehensive exploration of its statistical properties and theoretical results related to insurance are provided. Estimation is performed by using the method of log-moments and maximum likelihood. Also, as the modal value of this distribution is expressed in closed-form, composite parametric models are easily obtained by a mode matching procedure. The performance of both the mixture Pareto-loggamma distribution and composite models are tested by employing different claims datasets. Full article
(This article belongs to the Special Issue Loss Models: From Theory to Applications)
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