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1996
Models of price formation in securities markets suggest that privately informed investors create significant illiquidity costs for uninformed investors, implying that the required rates of return should be higher for securities that are relatively illiquid. An investigation is made of the empirical relation between monthly stock returns and measures of illiquidity obtained from intraday data.
1996
Actuaries value insurance claim accumulations using a compound Pois- son process to capture the random, discrete, and clustered nature of claim arrival, but the standard Black (1976) formula for pricing futures options assumes that the underlying futures price follows a pure diffu- sion. Extant jump-diffusion option valuation models either assume di- versifiable jump risk or resort to equilibrium arguments to account for jump risk premiums.
1996
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies.
1996
Kothari, Shanken, and Sloan (1995) claim that betas from annual returns produce a stronger positive relation between beta and average return than betas from monthly returns. They also contend that the relation between average return and book-to-market equity (BE/ME) is seriously exaggerated by survivor bias. Fama and French argue that survivor bias does not explain the relation between BE/ME and average return.
1996
A study is presented which supposes that asset pricing is governed by the CAPM or the ICAPM and the expected 1-period simple returns on the net cash flows (NCF) of investment projects are constant through time. The NCFs are then priced by discounting their expected values with their expected 1-period simple returns.
1996
The concept of multifactor portfolio theory plays a role in Merton‘s intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M.
1996
Asset share pricing models are used extensively in life and health insurance premium determination. In contrast, property/casualty ratemaking procedures consider only a single period of coverage. This is true for both traditional methods, such as loss ratio and pure premium ratemaking, and financial pricing models, such as discounted cash flow or internal rate of return models.
1996
For fifteen years, academicians peering into insurance ratemaking have led us on a chase of underwriting betas, in pursuit of economic and normative notions of "equilibrium rates of return" and "fair rates of re-turn." Underwriting betas, we were told, would elevate actuarial ratemaking to financial pricing-if only we could grasp hold of these will-o‘-the-wisp emanations from modern portfolio theory.
1996
We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital pro- ductivity is high and overinvestment when it is low.
1996
Losses from natural disasters have increased in recent years due to growth of population in hazard-prone areas and inadequate enforcement of building codes. This article first examines why homeowners have not voluntarily adopted cost-effective protective measures and have limited interest in purchasing insurance.
1996
A discussion of the efficient markets hypothesis and asset pricing theory is presented. If capital markets were completely efficient, then the market value of the firm would reflect the present value of the firm‘s expected future net cash flows. Thus, the strong form of the efficient markets hypothesis has several important implications for corporate finance.
1996
Both the rise of hostile takeovers and the phenomenal success of LBOs in the 1980s can be explained in part as capital market responses to the shortcomings of the top-down, EPS-based model of financial management that has long dominated corporate America.
1996
An insurer remains solvent as long as assets exceed liabilities in value. Both assets and liabilities fluctuate in value in an unforeseen manner. An insurer with no margin in the value of its assets over its liabilities is therefore exposed to failure. The chance of failure is reduced if such a margin is created. This margin may be recognised as net assets, or capital. Capital is not a costless commodity.
1996
This paper examines a class of premium functionals which are (I) comonotonic additive and (ii) stochastic dominance preservative. The representation for this class is a transformation of the decumulative distribution function. It has close connections with the recent developments in economic decision theory and non-additive measure theory.
1995
The envisioned role of the appointed actuary encompasses the evaluation of the insurance company’s financial condition under a range of likely future conditions. Two types of valuation methods are being developed for this task: stochastic simulation and scenario testing.
Stochastic simulation is presently the more heralded method, due to the seminal work of British and Finnish actuaries.
1995
The usual chain ladder method is a deterministic claims reserving method. In the last years, a stochastic loglinear approximation to the chain ladder method has been used by several authors especially in order to quantify the variability of the estimated claims reserves. Although the reserves estimated by both methods are clearly different, the loglinear approximation has been called "chain ladder," too, by these authors.
1995
A fundamental problem in actuarial science is the determination of the reserves necessary to meet future obligations. Reserves are useful quantities because they summarize a vector of discounted cash flows. However, through this summarization, they mask the dynamic nature of interest rates.
1995
Introductory reserving concepts are defined and discussed, with emphasis on accounting concepts. The long-tailed versus short-tailed nature of various lines is discussed and the concepts of calendar year, accident year, and policy year are introduced. Various techniques used to estimate the ultimate value of known claims are described.
1995
This is a textbook on the CPCU 8 curriculum. It describes the principles and procedures of finance that specifically relate to the property-liability insurance companies. While not a comprehensive handbook on insurance accounting and finance, it nevertheless is sufficiently detailed to provide a working knowledge of the fundamental aspects of this subject area.
