Journal PostsJournal
[11] Alternative Risk Funding Solutions for Financial Risk - Part II
By Harry Niederau | August 22, 2009
Part II (to be published soon)
In this contribution we consider alternative risk funding solutions for pension funds as typical representatives of institutions with a strong risk exposure on the fixed asset side. The focus is on financial risk rather than the traditionally insurable part of pension fund risk. We put forward a simple insurance concept against stock market risk, in which the pensions funds and their shareholders are the insureds, the cells of an assumed rent-a-captive facility reinsure part of the the pension funds' exposure and a defined excess portion of asset risk is transferred to the reinsurance market in the wider sense, i.e. including the capital or derivative/OTC market. In particular we develop a dual trigger concept incorporating both an absolute and a relative means of capital protection. The latter benchmarks the investment strategy of the pension funds by means of the (algorithmic) trading vehicle of the core company against a direct "shadow investment" in the Dow Jones Industrial Average.
Topics: macro-economics, pricing in insurance | | Comments
[10] Alternative Risk Funding Solutions for Financial Risk - Part I
By Harry Niederau | June 4, 2009
In this post we continue the discussion launched in previous posts, i.e. [3] and [9], highlighting the limitations of diversification in the sense of Makrowitz but also those of employing derivative instruments (e.g. Put options) as stop loss type of insurance when stock markets contract. We stress that the balance sheets of organisations with a business related overhead in fixed asset positions, such as life (re-)insurers or pension funds, are affected most by the latter limitations. This sets the stage for discussing possible alternative solutions in the following posts.
Topics: pricing in insurance | | Comments
[9] Alternative Risk Funding Solutions for Financial Risks - Overview
By Harry Niederau | May 24, 2009
In the master document [3], published in February 2008, we have opened the discussion on insuritization concepts meaning to handle capital market risk. Unlike securitization, which in essence transfers reinsurance type of risk to the capital market by means of retrocession (e.g. cat bonds), insuritization does the opposite. This means it transfers capital market risk to the reinsurance market by means of forward integration. However, in the more general setting of insuritization, reinsurers need not to be of the traditional kind but hedge funds, private equity companies, spv's (special purpose vehicles), etc. may show up as "reinsurers" alike. Within the next couple of months we discuss insuritization of financial risk in a series of three contributions. Part one, to appear shortly, gives a basic motivation of insuritization-based concepts in economic down-cycles while part two sketches an idea of possible insuritization architectures. Part three puts forward a concrete business case elucidating in how far the results of the study in contribution [6] could be exploited in an alternative risk funding context for pensions funds or life insurers. The Feed function, "Journal Posts", in the lower part of the left side-bar may be used in order to be timely informed about updates.
Topics: macro-economics | | Comments
[8] Update on: Earning Returns in a 'Bear Market'
By Harry Niederau | February 14, 2009
With a bit of delay this project is about to finish in its first stage. Here a short overview on results. Over the last 49 years, very simple (i.e. non-leveraged) Wavelet based inter-day trading strategies yield an annual excess return well above 10%. In down turn cycles (such as at present) the annual excess return is even well beyond 20%. The reason for the latter is due to the fact that in down cycles investors seek less diversification but rather go for short term return maximization. This is reflected in the cascaded pattern of the index graph in such periods. This reduced level of diversification in turn produces autocorrelations in the Dow Jones series which are picked up by the wavelets in a systematic way. As of yet, we have focused on univariate forecasts in the wavelet domain, whilst predictions on a multivariate level proved beyond the scope of that kick-off project. For obvious reasons, more detailed results can only be shared on agreement.
Topics: macro-economics | | Comments
[7] Update on: quasi risk-neutral pricing
By Harry Niederau | February 3, 2009
The paper on Quasi Risk-Neutral Pricing in Insurance has been accepted for publication in the Astin Bulletin. Details concerning the date of appearance will be given in time.
Topics: pricing in insurance | | Comments
[6] Earning Returns in a 'Bear Market'
By Harry Niederau | August 13, 2008
The current 'bearish' market conditions pose challenges to the investment decisions of both private and institutional investors. Although it was observed in our February 2008 study that also in a bearish market substantial returns on investment can be realized, getting the entry and exit points right for investment or disinvestment decisions is by far more essential as compared to a 'bullish' market. In continuation of the analysis of long-term indicators of turning points in the Dow Jones Industrial Average along the past 40 years (see above link), we will endeavour to scrutinize in this study the power of more short- to medium-term predictions, especially those of turning pints. This analysis is carried out by employing so-called wavelet transforms to the Dow Jones data used in above mentioned study, but completed as of present date. Results of the study are expected towards the end of the year.
As with all contributions in our Journal, constructive comments or hints are welcome.
Topics: macro-economics | | Comments
[5] Quasi Risk-Neutral Pricing - Update
By Harry Niederau | July 12, 2008
The paper <<quasi risk-neutral pricing in insurance>>, submitted to the Astin Bulletin at mid November 2007, has passed the initial referee screening and is now under revision.
Topics: pricing in insurance | | Comments
[4] The Deliberate Investor
By Harry Niederau | March 15, 2008
As alluded to in our Dow Jones post in February 2008, structured products granting capital protection can be cost-intensive if capital protection is achieved by means of hedging. In this post we introduce a fictitious but substantial private investor who pursues and investment strategy in stocks which assures capital protection at a 95% level of confidence and which (up to the initial portfolio set-up) is free of transaction costs and costs of hedging. This post is supplemented by a small C++ optimization executable to mimic the outcome of such a strategy.
Topics: macro-economics | | Comments
[3] Dow Jones: Do we understand it?
By Harry Niederau | February 24, 2008
Project set-up and preliminary results.
Relating to the Dow Jones Industrial Average (DJIA) we allude to a macro-economic measure of risk-aversion in the sense of Pratt-Arrow and a leading indicator of switches in long-term trends of the DJIA in normalized scale. Albeit assumed as a fact in financial media, we scrutinize whether or not Dow titans outperform T-bonds on an expected return basis long-term. These subject matters are embedded in a context of discussing a new species of long-term investment products with application for instance to provision of old age.
Topics: macro-economics, pricing in insurance | | Comments
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