In view of the repeated severe market downturns since the turn of the century, the interest in ri... more In view of the repeated severe market downturns since the turn of the century, the interest in risk-based investment strategies has grown in recent years. However, such strategies have not yet made major inroads into the design of pension programs. In this paper, we fill this gap by combining a risk-managed investment strategy with a pension scheme where benefits are smoothed across generations by establishing a collective reserve. We demonstrate that combining the two helps to improve the performance of the pension investments and decreases the risk of a negative reserve in times of a market crisis. We furthermore investigate the implications of imposing varying degrees of diversification across assets in such a scheme.
The reactions to the stimulus package of the Obama administration have been controver-sial. Some ... more The reactions to the stimulus package of the Obama administration have been controver-sial. Some predict a multiplier effect in the order of 1.5, others argue that the multiplier will be less than 0.5. Multiplier estimates typically stem from estimated linear vector autoregres-sions (VARs) or simulations generated generated by DSGE models. The latter, presuming intertemporally optimizing agents, largely negate any impact of the fiscal stimulus package. In this paper, we will argue that neither conventional VAR analysis nor DGSE simulations may be appropriate to evaluate demand effects arising from such a stimulus package. The reason is that, as recent research suggests, the timing of demand shocks matters. To assess the multiplier’s variability, we adopt regime–dependent VAR approach. As we show in detail, our model specification is grounded on theoretical considerations. The empirical analysis presented here suggests that a regime–dependent VAR–specification is favored for U.S. out...
1. A Generalization of the Nested Logit Model T. Amemiya, Dongseok Kim. 2. Measurement Problems a... more 1. A Generalization of the Nested Logit Model T. Amemiya, Dongseok Kim. 2. Measurement Problems and Uncertainty in Monetary Policy K. Cabos, H.-J. Krupp. 3. On Median Unbiased Inference for First Order Autoregressive Models K. Carstensen, M.S. Paolella. 4. Goodness of Fit Measures and Model Selection in Qualitative Response Models Pu Chen, J. Frohn. 5. Portfolio Selection in the Presence of Heavy-tailed Asset Returns T. Doganoglu, et al. 6. Employment and Technological Change R. Hujer, D. Radic. 7. Outlier Robust Estimation of an Euler Equation Investment Model with German Firm Level Panel Data N. Janz. 8. Which Feeling is Stronger: Jealousy or Laziness? U. Jensen. 9. gh-transformation of Symmetrical Distributions I. Klein, M. Fischer. 10. Household Budget Data and Welfare Comparisons: A Reconciliation K. Kohn, M. Missong. 11. Unit Root Tests in the Presence of Innovational Outliers M. Lanne, et al. 12. Comparison of M3 and Divisia M3 Aggregates for the Euro Area H.-E. Reimers. 13. Linear and Nonlinear Dirichlet Share Equations Models G. Ronning. 14. On the Bias of Structural Estimation Methods in a Polynomial Regression with Measurement Error When the Distribution of the Latent Covariate is Misspecified H. Schneeuweiss, et al. 15. Exponential Smoothings as an Alternative to the Hodrick-Prescott Filter? K.-H. Todter. 16. Long-Run Relationships in the Transition Economy of Poland: An Application of SVEqCM A. Welfe. 17. Growth Determinants of Poland's EconomicPotential W. Welfe. 18. Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the US and Europe J. Wolters.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich a... more Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
Recent empirical studies suggest that a number of economic time series cannot be viewed as the ou... more Recent empirical studies suggest that a number of economic time series cannot be viewed as the output of a linear, Gaussian process. These findings are compatible with earlier claims by Mitchell (1927), Keynes (1936), and Hicks (1950) that the nature of economic activities varies over the different stages of a business cycle. Specifically, these authors observed that expansions are more persistent but less sharp than recessions. The presence of asymmetries in business cycles would have important theoretical and practical implications. For examples, economic theories would have to explain such asymmetries. Similarly, models used for forecasting or policy-analysis purposes should reflect asymmetric properties. To categorize the sources of asymmetric behavior, we view a variable as the output of a stochastic dynamic system as illustrated in Figure 1. Let the system be represented by
The Solvency II regulatory framework specifies procedures and parameters for determining solvency... more The Solvency II regulatory framework specifies procedures and parameters for determining solvency capital requirements (SCRs) for insurance companies. The proposed standard SCR calculations involve two steps. The Value–at–Risk (VaR) of each risk driver is measured and, in a second step, all components are aggregated to the company’s overall SCR, using the Standard Formula. This formula has two inputs: the VaRs of the individual risk drivers and their correlations. The appropriate calibration of these input parameters has been the purpose of various Quantitative Impact Studies that have been conducted during recent years. This paper demonstrates that the parameter calibration for the equity–risk module—overall, with about 25%, the most significant risk component—is seriously flawed, giving rise to spurious and highly erratic parameter values. As a consequence, an implementation of the Standard Formula with the currently proposed calibration setting...
Based on observations of d-dimensional random vectors in the domain of attraction of a stable dis... more Based on observations of d-dimensional random vectors in the domain of attraction of a stable distribution with (multi-)index @a = (@a"1, ..., @a"d), an estimator for the dependence function of the @a"i-stable variables is constructed. The estimator utilizes the @a-tail-estimator and an estimator of the spectral measure of the @a-stable law. This estimator gives rise to a test of association of the stable components and various quantitative measures of association.
International Journal of Theoretical and Applied Finance
We present a new framework for Hermite fractional financial markets, generalizing the fractional ... more We present a new framework for Hermite fractional financial markets, generalizing the fractional Brownian motion (FBM) and fractional Rosenblatt markets. Considering pure and mixed Hermite markets, we introduce a strategy-specific arbitrage tax on the rate of transaction volume acceleration of the hedging portfolio as the prices of risky assets change, allowing us to transform Hermite markets with arbitrage opportunities to markets with no arbitrage opportunities within the class of Markov trading strategies. We derive PDEs for the price of such strategies in the presence of an arbitrage tax in pure Hermite, mixed Hermite, and Black–Scholes–Merton diffusion markets.
... Nolan [8] presents an algorithm which approximates the PDF by Direct Numerical Integration (i... more ... Nolan [8] presents an algorithm which approximates the PDF by Direct Numerical Integration (in short, DNI) of the CF, using Zolotarev's [9] socalled Mparametrization. ... 8. JP Nolan, An algorithm for evaluating stable densities in Zolotarev's (M) parametrization, Mathl. Comput. ...
In view of the repeated severe market downturns since the turn of the century, the interest in ri... more In view of the repeated severe market downturns since the turn of the century, the interest in risk-based investment strategies has grown in recent years. However, such strategies have not yet made major inroads into the design of pension programs. In this paper, we fill this gap by combining a risk-managed investment strategy with a pension scheme where benefits are smoothed across generations by establishing a collective reserve. We demonstrate that combining the two helps to improve the performance of the pension investments and decreases the risk of a negative reserve in times of a market crisis. We furthermore investigate the implications of imposing varying degrees of diversification across assets in such a scheme.
The reactions to the stimulus package of the Obama administration have been controver-sial. Some ... more The reactions to the stimulus package of the Obama administration have been controver-sial. Some predict a multiplier effect in the order of 1.5, others argue that the multiplier will be less than 0.5. Multiplier estimates typically stem from estimated linear vector autoregres-sions (VARs) or simulations generated generated by DSGE models. The latter, presuming intertemporally optimizing agents, largely negate any impact of the fiscal stimulus package. In this paper, we will argue that neither conventional VAR analysis nor DGSE simulations may be appropriate to evaluate demand effects arising from such a stimulus package. The reason is that, as recent research suggests, the timing of demand shocks matters. To assess the multiplier’s variability, we adopt regime–dependent VAR approach. As we show in detail, our model specification is grounded on theoretical considerations. The empirical analysis presented here suggests that a regime–dependent VAR–specification is favored for U.S. out...
1. A Generalization of the Nested Logit Model T. Amemiya, Dongseok Kim. 2. Measurement Problems a... more 1. A Generalization of the Nested Logit Model T. Amemiya, Dongseok Kim. 2. Measurement Problems and Uncertainty in Monetary Policy K. Cabos, H.-J. Krupp. 3. On Median Unbiased Inference for First Order Autoregressive Models K. Carstensen, M.S. Paolella. 4. Goodness of Fit Measures and Model Selection in Qualitative Response Models Pu Chen, J. Frohn. 5. Portfolio Selection in the Presence of Heavy-tailed Asset Returns T. Doganoglu, et al. 6. Employment and Technological Change R. Hujer, D. Radic. 7. Outlier Robust Estimation of an Euler Equation Investment Model with German Firm Level Panel Data N. Janz. 8. Which Feeling is Stronger: Jealousy or Laziness? U. Jensen. 9. gh-transformation of Symmetrical Distributions I. Klein, M. Fischer. 10. Household Budget Data and Welfare Comparisons: A Reconciliation K. Kohn, M. Missong. 11. Unit Root Tests in the Presence of Innovational Outliers M. Lanne, et al. 12. Comparison of M3 and Divisia M3 Aggregates for the Euro Area H.-E. Reimers. 13. Linear and Nonlinear Dirichlet Share Equations Models G. Ronning. 14. On the Bias of Structural Estimation Methods in a Polynomial Regression with Measurement Error When the Distribution of the Latent Covariate is Misspecified H. Schneeuweiss, et al. 15. Exponential Smoothings as an Alternative to the Hodrick-Prescott Filter? K.-H. Todter. 16. Long-Run Relationships in the Transition Economy of Poland: An Application of SVEqCM A. Welfe. 17. Growth Determinants of Poland's EconomicPotential W. Welfe. 18. Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the US and Europe J. Wolters.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich a... more Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
Recent empirical studies suggest that a number of economic time series cannot be viewed as the ou... more Recent empirical studies suggest that a number of economic time series cannot be viewed as the output of a linear, Gaussian process. These findings are compatible with earlier claims by Mitchell (1927), Keynes (1936), and Hicks (1950) that the nature of economic activities varies over the different stages of a business cycle. Specifically, these authors observed that expansions are more persistent but less sharp than recessions. The presence of asymmetries in business cycles would have important theoretical and practical implications. For examples, economic theories would have to explain such asymmetries. Similarly, models used for forecasting or policy-analysis purposes should reflect asymmetric properties. To categorize the sources of asymmetric behavior, we view a variable as the output of a stochastic dynamic system as illustrated in Figure 1. Let the system be represented by
The Solvency II regulatory framework specifies procedures and parameters for determining solvency... more The Solvency II regulatory framework specifies procedures and parameters for determining solvency capital requirements (SCRs) for insurance companies. The proposed standard SCR calculations involve two steps. The Value–at–Risk (VaR) of each risk driver is measured and, in a second step, all components are aggregated to the company’s overall SCR, using the Standard Formula. This formula has two inputs: the VaRs of the individual risk drivers and their correlations. The appropriate calibration of these input parameters has been the purpose of various Quantitative Impact Studies that have been conducted during recent years. This paper demonstrates that the parameter calibration for the equity–risk module—overall, with about 25%, the most significant risk component—is seriously flawed, giving rise to spurious and highly erratic parameter values. As a consequence, an implementation of the Standard Formula with the currently proposed calibration setting...
Based on observations of d-dimensional random vectors in the domain of attraction of a stable dis... more Based on observations of d-dimensional random vectors in the domain of attraction of a stable distribution with (multi-)index @a = (@a"1, ..., @a"d), an estimator for the dependence function of the @a"i-stable variables is constructed. The estimator utilizes the @a-tail-estimator and an estimator of the spectral measure of the @a-stable law. This estimator gives rise to a test of association of the stable components and various quantitative measures of association.
International Journal of Theoretical and Applied Finance
We present a new framework for Hermite fractional financial markets, generalizing the fractional ... more We present a new framework for Hermite fractional financial markets, generalizing the fractional Brownian motion (FBM) and fractional Rosenblatt markets. Considering pure and mixed Hermite markets, we introduce a strategy-specific arbitrage tax on the rate of transaction volume acceleration of the hedging portfolio as the prices of risky assets change, allowing us to transform Hermite markets with arbitrage opportunities to markets with no arbitrage opportunities within the class of Markov trading strategies. We derive PDEs for the price of such strategies in the presence of an arbitrage tax in pure Hermite, mixed Hermite, and Black–Scholes–Merton diffusion markets.
... Nolan [8] presents an algorithm which approximates the PDF by Direct Numerical Integration (i... more ... Nolan [8] presents an algorithm which approximates the PDF by Direct Numerical Integration (in short, DNI) of the CF, using Zolotarev's [9] socalled Mparametrization. ... 8. JP Nolan, An algorithm for evaluating stable densities in Zolotarev's (M) parametrization, Mathl. Comput. ...
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