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Article
Publication date: 19 July 2009

Peter J. Phillips, Michael Baczynski and John Teale

The purpose of this paper is to determine whether self‐managed superannuation fund (SMSF) trustees earn: the equity risk premium or any premium to the riskless rate of interest.

Abstract

Purpose

The purpose of this paper is to determine whether self‐managed superannuation fund (SMSF) trustees earn: the equity risk premium or any premium to the riskless rate of interest.

Design/methodology/approach

Using a sample of 100 SMSFs, the average annual returns since inception of the funds in the sample are compared with: the average annual equity risk premium since that time and the average yield of Commonwealth Government Securities since that time.

Findings

The investigation reveals: the SMSFs in the sample do not earn the equity risk premium and the SMSFs in the sample did not earn a premium to riskless rate of interest. This leads to the conclusion that the SMSFs have borne risk without commensurate reward. Research limitations/implications – The trustees' rationale for making particular investment decisions and the consistency of the portfolio structures with the risk profiles of the trustees are two areas that may be fruitfully explored in future research.

Practical implications

For SMSF trustees, a simple portfolio that divides assets between (unmanaged) index funds and risk‐free securities on the basis of trustees' risk aversion may generate better results than the existing portfolios. For policy makers, the relatively poor performance of SMSFs implies that the superannuation system as currently structured may not be generating returns that will maximize retirement incomes.

Originality/value

The paper provides the first comparison of SMSF returns with the equity risk premium and the riskless rate of interest measured at appropriate horizons.

Details

Accounting Research Journal, vol. 22 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

Book part
Publication date: 2 March 2011

Martín Grandes, Marcel Peter and Nicolas Pinaud

The currency premium is one of the three components of the differential between local and foreign interest rates. Emerging economies such as South Africa typically face positive…

Abstract

The currency premium is one of the three components of the differential between local and foreign interest rates. Emerging economies such as South Africa typically face positive interest rate differentials, that is, a higher cost of capital than developed economies. In this chapter we aim at identifying the determinants of the South African rand–U.S. dollar currency premium using monthly data over the period 1997–2008. We carry out an empirical analysis using dynamic time series econometric techniques to estimate the determinants of the one-month and one-year currency premia. Our findings show that the currency premia at both horizons are driven by long-run movements in the expected inflation differential between South Africa and the United States, risk aversion as a proxy for the price of rand exchange risk, and the volatility of the rand exchange rate as an indicator of the quantity of that risk. Misalignments in the real effective or rand–U.S. dollar bilateral exchange rates display mixed results in terms of their impact and statistical significance on both currency premium. Our parameter estimators overall are stable and robust to sample variations. Monetary policy is an important determinant of currency premia at both one-month and one-year horizons, but risk aversion is equally important to determine its time fluctuations.

Details

The Impact of the Global Financial Crisis on Emerging Financial Markets
Type: Book
ISBN: 978-0-85724-754-4

Keywords

Article
Publication date: 3 July 2020

Florian Klein and Hato Schmeiser

The purpose of this paper is to determine optimal pooling strategies from the perspective of an insurer's shareholders underlying a default probability driven premium loading and…

Abstract

Purpose

The purpose of this paper is to determine optimal pooling strategies from the perspective of an insurer's shareholders underlying a default probability driven premium loading and convex price-demand functions.

Design/methodology/approach

The authors use an option pricing framework for normally distributed claims to analyze the net present value for different pooling strategies and contrast multiple risk pools structured as a single legal entity with the case of multiple legal entities. To achieve the net present value maximizing default probability, the insurer adjusts the underlying equity capital.

Findings

The authors show with the theoretical considerations and numerical examples that multiple risk pools with multiple legal entities are optimal if the equity capital must be decreased. An equity capital increase implies that multiple risk pools in a single legal entity are generally optimal. Moreover, a single risk pool for multiple risk classes improves in relation to multiple risk pools with multiple legal entities whenever the standard deviation of the underlying claims increases.

Originality/value

The authors extend previous research on risk pooling by introducing a default probability driven premium loading and a relation between the premium level and demand through a convex price-demand function.

Details

The Journal of Risk Finance, vol. 21 no. 3
Type: Research Article
ISSN: 1526-5943

Keywords

Book part
Publication date: 30 November 2011

Massimo Guidolin

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…

Abstract

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.

Details

Missing Data Methods: Time-Series Methods and Applications
Type: Book
ISBN: 978-1-78052-526-6

Keywords

Book part
Publication date: 20 March 2007

Joseph Heath

Few issues in business ethics are as polarizing as the practice of risk classification and underwriting in the insurance industry. Theorists who approach the issue from a…

Abstract

Few issues in business ethics are as polarizing as the practice of risk classification and underwriting in the insurance industry. Theorists who approach the issue from a background in economics often start from the assumption that policy-holders should be charged a rate that reflects the expected loss that they bring to the insurance scheme. Yet theorists who approach the question from a background in philosophy or civil rights law often begin with a presumption against so-called “actuarially fair” premiums and in favor of “community rating,” in which everyone is charged the same price. This paper begins by examining and rejecting the three primary arguments that have been given to show that actuarially fair premiums are unjust. It then considers the two primary arguments that have been offered by those who wish to defend the practice of risk classification. These arguments overshoot their target, by requiring a “freedom to underwrite” that is much greater than the level of freedom enjoyed in most other commercial transactions. The paper concludes by presenting a defense of a more limited right to underwrite, one that grants the legitimacy of the central principle of risk classification, but permits specific deviations from that ideal when other important social goods are at stake.

Details

Insurance Ethics for a More Ethical World
Type: Book
ISBN: 978-1-84950-431-7

Article
Publication date: 4 September 2017

Hugh F. Kelly

The purpose of this paper is to develop benchmarking standards for risk premiums in capitalization rates and commercial mortgage rates, to examine the impact of investor choice of…

Abstract

Purpose

The purpose of this paper is to develop benchmarking standards for risk premiums in capitalization rates and commercial mortgage rates, to examine the impact of investor choice of property type and geographic markets on those risk premiums, and to supplement the quantitative analysis with historical and behavioral decision-making factors.

Design/methodology/approach

Using data sets extending from 1Q 1995 to 2Q 2016, a range of risk premiums is calculated and norms established at the 65th and 35th percentiles by property type and investment position. Relative levels of the risk premiums are compared to three defined categories of urban markets, to discover potential risks in yield-seeking market selection. A historical context is discussed to illustrate that prudential judgment is needed to supplement statistical measures of risk.

Findings

A stable range of risk premiums is identified for the pre-financial crisis period 1995-2003, the dislocations of risk pricing 2004-2007 leads to an extreme reaction 2009-2012. A period of “renormalization” is hypothesized thereafter. An important distinction is made between the transaction peak of 2007, and the numerically similar peak of 2015. Taxonomy of urban property markets is adduced.

Practical implications

Investment analyses and portfolio allocation decisions can benefit from a longitudinal examination of risk premiums hitherto unavailable. The proposed taxonomy of markets has been shown (elsewhere) to correlate to investment performance. City planners may wish to capture increased real estate value stemming from investor preferences among cities.

Originality/value

The risk premium benchmarking is not previously available in the scholarly literature. The historical context as a prudential element in evaluating risk is not often emphasized in the finance literature.

Details

Journal of Property Investment & Finance, vol. 35 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 5 September 2022

Joseph Oscar Akotey, Godfred Aawaar and Nicholas Addai Boamah

This research explores to answer the question: What accounts for the substantial underwriting losses in the Ghanaian insurance industry?

Abstract

Purpose

This research explores to answer the question: What accounts for the substantial underwriting losses in the Ghanaian insurance industry?

Design/methodology/approach

Thirty-four (34) insurers' audited financial reports covering the period of 2007 to 2017 were analysed through dynamic panel regression to uncover the underlying causes of high underwriting losses in the Ghanaian insurance industry.

Findings

The findings indicate that efforts at increasing market share by overtrading add no value to insurers underwriting profitability. The underwriting risk suggests that the industry charges disproportionately too small premiums for the risks it underwrites. This may indicate under-pricing by some insurers to grow their customer base.

Practical implications

The findings have implications for managerial efficiency and risk management structures that align compensation with underwriting efficiency.

Originality/value

The association between managerial preference and the underwriting performance of insurers in emerging markets has rarely been researched. This study responds to this knowledge challenge.

Details

African Journal of Economic and Management Studies, vol. 14 no. 1
Type: Research Article
ISSN: 2040-0705

Keywords

Article
Publication date: 31 December 2002

Gary D. Schnitkey, Bruce J. Sherrick and Scott H. Irwin

This study evaluates the impacts on gross revenue distributions of the use of alternative crop insurance products across different coverage levels and across locations with…

Abstract

This study evaluates the impacts on gross revenue distributions of the use of alternative crop insurance products across different coverage levels and across locations with differing yield risks. Results are presented in terms of net costs, values‐at‐risk, and certainty equivalent returns associated with five types of multi‐peril crop insurance across different coverage levels. Findings show that the group policies often result in average payments exceeding their premium costs. Individual revenue products reduce risk in the tails more than group policies, but result in greater reductions in mean revenues. Rankings based on certainty equivalent returns and low frequency VaRs generally favor revenue products. As expected, crop insurance is associated with greater relative risk reduction in locations with greater underlying yield variability.

Details

Agricultural Finance Review, vol. 63 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

Book part
Publication date: 16 February 2006

Dalia Grigonytė

Theory suggests that as long as a country runs a balanced budget regime, there is no linkage between fiscal variables and the interest rates. In the case of fiscal expansion that…

Abstract

Theory suggests that as long as a country runs a balanced budget regime, there is no linkage between fiscal variables and the interest rates. In the case of fiscal expansion that is not sufficiently covered by government revenues, however, the government has two options to finance its deficit: printing money or additional borrowing. Both options lead to an increase in the risk premia on government bonds. One strand of literature focuses on a currency crisis that emerges as a necessary outcome in light of contradictions between fixed exchange rate, and fiscal and financial fundamentals. If government bonds are denominated in domestic currency, the government can reduce their real value by higher inflation or by devaluation of the national currency. In order to bear this risk foreign investors require a currency risk premium. Governments can eliminate the risk of currency devaluation by issuing bonds denominated in foreign currencies, but the default risk remains and it depends on public finances. Another strand of the literature looks at the relation between fiscal variables and government bond yields in the framework of portfolio balance model.

Details

Emerging European Financial Markets: Independence and Integration Post-Enlargement
Type: Book
ISBN: 978-0-76231-264-1

Article
Publication date: 30 August 2022

Kai Li and Chenjie Xu

This paper aims to study the asset pricing implications for stock and bond markets in a long-run risks (LRR) model with regime shifts. This general equilibrium framework can not…

Abstract

Purpose

This paper aims to study the asset pricing implications for stock and bond markets in a long-run risks (LRR) model with regime shifts. This general equilibrium framework can not only generate sign-switching stock-bond correlations and bond risk premium, but also quantitatively reproduce various other salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns.

Design/methodology/approach

The researchers study the joint determinants of stock and bond returns in a LRR model framework with regime shifts in consumption and inflation dynamics. In particular, the means, volatilities, and the correlation structure between consumption growth and inflation are regime-dependent.

Findings

The model shows that the term structure of interest rates and stock-bond correlation are intimately related to business cycles, while LRR play a more important role in accounting for high equity premium than do business cycle risks.

Originality/value

This paper studies the joint determinants of stock and bond returns in a Bansal and Yaron (2004) type of LRR framework. This rational expectations general equilibrium framework can (1) jointly match the dynamics of consumption, inflation and cash flow; (2) generate time-varying and sign-switching stock and bond correlations, as well as generating sign-switching bond risk premium; and (3) coherently explain another long list of salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns.

Details

China Finance Review International, vol. 12 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

11 – 20 of over 22000