Premium Model Research Articles

The 2008 Crisis: An International Finance (Over)view

The aim of this paper is to present an international finance view of the 2008 crisis. By relying on four traditional international finance classes of models (the intertemporal current account approach, two exchange rate risk premium models and open-economy economic policy models), we addresed, theoretically, the importance of macro-finance aspects of the episode such as portfolio reallocation and its aggregate effects, using data for supporting the claims. Moreover, by telling the story of the crisis, divided in three periods (Great Moderation, Great Recession and Euro Crisis) we provided an overview of the deployments as well as an understanding of the development from a slightly point of view.

Renewable energy in the European Union: support policy and outcomes

The article deals with the study of support schemes for renewable energy promotion in the European Union member states. The main strategic documents that declare short-term and long-term goals to increase the share of green energy in final energy consumption of the European Union are considered. The primary motivational mechanisms aimed at encouraging the production of energy from renewable energy sources, namely feed-in tariff models, feed-in premium model, and tradable green certificate scheme are analyzed. In addition, a number of secondary motivational tools such as tender systems, net metering, tax and customs privileges which are used in combination with the primary mechanisms for more effective promotion of renewable energy are described. The results of the influence of policy in renewable energy field on increasing the share of green energy in the total energy mixes of European Union member states are presented.

The risk premium of gold

This paper examines the properties of the gold risk premium. We estimate a parsimonious model for the gold risk premium and uncover important time variations in the dynamics of the risk premium. We also estimate the risk premia of the stock and bond markets and investigate their co-movements. The results show that the co-movements of expected gold returns with expected returns of stocks and bonds are positive, while co-movements of realized returns are zero or negative on average. This results holds not only during normal market periods, but also in times of market stress. Furthermore, we find no significant co-movement of expected and realized returns of gold with inflation.

Green Premium Evidence from Climatic Areas: A Case in Southern Europe, Alicante (Spain)

The existence of a green premium in house (asking) prices in Alicante province, Spain, are analyzed using circa 9000 property observations. In developing the sample, information from energy efficiency certificates was matched with two other databases. The model tests for green premium by climatic zones using pool Ordinary Least Squares (pool-OLS) and Instrumental Variables (IV) hedonic models, adds new knowledge concerning the existence of green premiums from Southern Europe, explores differences in their estimation by climatic zone, debates the nature of the estimated green parameters, and explains the role of endogeneity in hedonic green premium models. The empirical evidence assesses the sensitivity of asking price to either energy consumption (KWh) or carbon dioxide emissions (CO2) with an apparent premium of 3%, and captures an association with efficiency rating from G to F of 1.8% and from F to E of 1.1%. Significantly, the results relating to price responses show a distinct variation between the coast and the cooler climatic zone of the interior. The paper shows that energy efficiency incentive policies should discriminate by climatic areas, and provides a price reference by which to assess the amount of incentives needed to achieve European Union (EU) objectives.

Foreign Exchange Return Predictability: Rational Expectations Risk Premium vs. Expectational Errors

We propose a simple identification scheme for the causes of the violations of uncovered interest parity. Our method uses the serial dependence patterns of excess returns as a criterion for judging performance of economic models. We show that a mean reverting component in excess returns, representing a violation of uncovered interest parity, mainly contributes to generating different serial dependence patterns of excess returns: rational expectations risk premium models tend to generate negative serial dependence of excess returns, while expectational errors models tend to generate positive serial dependence.

Foreign Exchange Return Predictability: Rational Expectations Risk Premium vs. Expectational Errors

We propose a simple identification scheme for the causes of the violations of uncovered interest parity. Our method uses the serial dependence patterns of excess returns as a criterion for judging performance of economic models. We show that a mean reverting component in excess returns, representing a violation of uncovered interest parity, mainly contributes to generating different serial dependence patterns of excess returns: rational expectations risk premium models tend to generate negative serial dependence of excess returns, while expectational errors models tend to generate positive serial dependence.

Estimating the conditional equity risk premium in African frontier markets

This paper estimates the forward-looking coefficients of risk aversion and the equity risk premia in frontier equity markets in Africa. Applying the Bilinear GARCH (BGARCH) in the consumption-based asset pricing framework, we link the stochastic discount factor to conditional volatility to estimate the predicted equity risk premium using monthly data between January 1998 and June 2016. We find that in addition to accounting for the covariation between the lagged values of the Stochastic Discount Factor and asset returns, it is crucial to account for the time varying estimates of the coefficients of risk aversion to mimic the volatility structure in the different markets. The presence of risk aversion coefficients that take on both positive and negative values at different times provides insight into the different hedging attributes of the African stock markets though the diversification benefits that could arise from such insights are an open question that lay ground for further work in this area. The results presented in this paper provide a framework for conditional asset pricing in African Frontier Markets which is more consistent with the forward-looking approach to risk estimation than the traditional risk premium models.

Uncovering China's Stock Market Risk Return Relation: Crazy Casino Punters or Risk Averse Investors?

We investigate the risk-return relation using data from China. Because it is segmented from the rest of the global financial market, China’s market allows us to shed new light on this important relation of which previous empirical evidence is inconclusive. Market variance and scaled market prices jointly forecast excess market returns. The relation with conditional equity premium is positive for market variance and negative for scaled market prices, although the two predictors correlate positively with each other. These findings are similar to those documented in the U.S. market; they suggest a multi-factor conditional equity premium model.

Currency risk premia: Perceptions of downside risk and deviations from benchmark values

AbstractThis paper examines the empirical performance of an alternative model of the currency risk premium. This model relates risk not to the variance of returns but rather to potential crash risk based on the deviation, or “gap,” between the exchange rate and perceptions of its benchmark value. The model is tested using a novel data set of traders' exchange rate forecasts, from 1986:08 to 2013:09. The forecast data eliminate the need for a joint hypothesis about expectations formation through direct measurement of the market's ex ante premium. To measure the benchmark value, rather than use purchasing power parity, we relate it to recent levels through a moving average. Strong support is found for the prediction that the premium comoves positively with the “gap” measure of risk, according to cointegrated vector autoregression analyses for all four markets examined. This result is robust for moving averages from six to 24 months and when controlling for exchange rate volatility. The findings suggest how investors assess downside risk ex ante, at least in part, and may rationalize the application of certain technical analysis.

Asymmetric Effects of Fiscal Balance on Monetary Variables: Evidence from Emerging Economies

Purpose: This paper aims to investigate the nonlinear impacts of the fiscal balance on interest rates, exchange rates and in inflation in emerging economies, based on the model of sovereign risk premium. Methodology: The paper applies asymmetric cointegration modeling in a nonlinear autoregression distributed lag (ARDL) framework (Shin et al., 2014) to discriminate the effects of negative and positive changes in the fiscal balance on monetary variables in Brazil, Russia, India, and China (BRICs), using quarterly observations from around 2000 to 2016. Findings: The divergence in empirical evidence of asymmetric effects among BRICs is a distinct feature of this paper. Our results underline that monetary variables react di erently to negative and positive changes in the fiscal balance over the long run for Brazil and India, but not for China and Russia. Practical implications: Since monetary variables are more sensitive to worsening fiscal position in periods when budget de ficits tend to rise, fiscal consolidation is an essential criterion for the effectiveness of monetary policy in emerging economies characterized with large fiscal imbalance and debt stocks, such as Brazil and India. The implementation of expansionary fiscal policy should be reconsidered carefully even in economies with a better fi scal performance like China and Russia, as the persistently rising budget de ficits eventually counter the effectiveness of monetary policy by keeping market interest rates and inflation at high levels. Originality/Value: This paper provides evidence in favour of the dominant role of fi scal policy to stabilise interest rates, exchange rates, and inflation in emerging economies with high default risks stemming from chronically high fi scal de cits. We also highlight the importance of long-term fiscal sustainability to improve the effectiveness of monetary policy.

Modelling Electricity Swaps with Stochastic Forward Premium Models

We present a new model for pricing electricity swaps. Two general factors affect contracts but unique risk elements affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique elements are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk but our model gives estimates that are more exact.Keywords: Electricity swaps; Stochastic forward premium; Multivariate Normal Inverse Gaussian distribution; Levy processes

Risk adjustment model of credit life insurance using a genetic algorithm

In managing the risk of credit life insurance, insurance company should acknowledge the character of the risks to predict future losses. Risk characteristics can be learned in a claim distribution model. There are two standard approaches in designing the distribution model of claims over the insurance period i.e, collective risk model and individual risk model. In the collective risk model, the claim arises when risk occurs is called individual claim, accumulation of individual claim during a period of insurance is called an aggregate claim. The aggregate claim model may be formed by large model and a number of individual claims. How the measurement of insurance risk with the premium model approach and whether this approach is appropriate for estimating the potential losses occur in the future. In order to solve the problem Genetic Algorithm with Roulette Wheel Selection is used.

PEMODELAN MATEMATIKA PREMI TUNGGAL BERSIH ASURANSI UNIT LINK SYARIAH

The exact risk factor can be managed by transferring the risk to the other party (in this case the insurance company). In this paper will be discussed more life insurance, as the development now there are types of insurance combined with investment, which is popular with the term Unit Link insurance. Unit link Syariah began to be launched as one of the fulfilment of the high needs of the community, the privilege of the product Unit of Islamic links is actually located in the elements of the laws in accordance with Islamic Syariah. The issues that will be discussed are how to get a single premium model of life insurance unit link Syariah with life insurance and investment fund allocation invested in investment product with a big interest rate of risk (financial approach) and investment product with the value of return maximum (actuarial approach). The resulting model is then implemented in case of examples by comparing the two approaches to see the shortcomings and advantages of Unit link lifetime life insurance when compared to life insurance. The result obtained from this research is the benefit obtained from Unit-linked sharia insurance on average will be greater if compared with life insurance for life, maximum benefit will be obtained Insurance Unit Link of sharia using actuarial approach compared to financial, but benefit with a relative financial approach more stable than actuarial approaches that tend to fluctuate.

A General Equilibrium Model of the Value Premium with Time-Varying Risk Premia

This paper presents a quantitative, general equilibrium model of the value premium and equity premium. Value firms are temporarily low productivity firms, which will eventually experience high cash flows. The present value of these temporally distant cash flows is especially sensitive to equity premium movements, which are driven by changes in consumption volatility. The value premium is the reward for bearing this sensitivity. Empirical evidence verifies that value firms have higher cash-flow growth. The data also show that value stock returns are more sensitive to consumption volatility shocks.

The Risk Premium of Gold

This paper examines the properties of the gold risk premium. We estimate a parsimonious model for the gold risk premium and uncover important time variations in the dynamics of the risk premium. We also estimate the risk premia of the stock and bond markets and investigate their co-movements. The results show that the co-movements of expected gold returns with expected returns of stocks and bonds are positive, while co-movements of realized returns are zero or negative on average. This results holds not only during normal market periods, but also in times of market stress. Furthermore, we find no significant co-movement of expected and realized returns of gold with inflation.

Implied fractional hazard rates and default risk distributions

Default probability distributions are often defined in terms of their conditional default probability distribution, or their hazard rate. By their definition, they imply a unique probability density function. The applications of default probability distributions are varied, including the risk premium model used to price default bonds, reliability measurement models, insurance, etc. Fractional probability density functions (FPD), however, are not in general conventional probability density functions (Tapiero and Vallois, Physica A,. Stat. Mech. Appl. 462:1161–1177, 2016). As a result, a fractional FPD does not define a fractional hazard rate. However, a fractional hazard rate implies a unique and conventional FPD. For example, an exponential distribution fractional hazard rate implies a Weibull probability density function while, a fractional exponential probability distribution is not a conventional distribution and therefore does not define a fractional hazard rate. The purpose of this paper consists of defining fractional hazard rates implied fractional distributions and to highlight their usefulness to granular default risk distributions. Applications of such an approach are varied. For example, pricing default bonds, pricing complex insurance contracts, as well as complex network risks of various granularity, that have well defined and quantitative definitions of their hazard rates.

Modelling Electricity Swaps with Stochastic Forward Premium Models

We present a new model for pricing electricity swaps. Two general factors affect all contracts but unique risk factors affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique factors are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk whereas our model gives estimates that are more accurate.

A Premium and UPR Risk Model in Non-Life Insurance

In this paper we present a stochastic model that allows to derive estimators for the Mean Squared Error of Prediction (MSEP) of the one-year uncertainty related to the premium and Unearned Premium Reserve (UPR) risk (as defined according to the modified Swiss Solvency Test methodology outlined in Siegenthaler). The theory is based on the well known Buhlmann-Straub model and propose new estimators which might be used in the Solvency Capital Requirement (SCR) calculation as defined in the Swiss and European regulation.

A search-theoretic model of the term premium

A consistent empirical feature of bond yields is that term premia are, on average, positive. The majority of theoretical explanations for this observation have viewed the term premia through the lens of the consumption based capital asset pricing model. In contrast, we harken to an older empirical literature which attributes the term premium to the idea that short maturity bonds are inherently more liquid. The goal of this paper is to provide a theoretical justification of this concept. To that end, we employ a monetary-search model extended to include assets of different maturities. Short term assets mature in time to take advantage of random consumption opportunities. Long term assets cannot be used directly to purchase consumption, but agents may liquidate them in a secondary asset market characterized by search and bargaining frictions. Our model delivers three results that are consistent with empirical facts. First, long term assets have higher rates of return in steady state to compensate agents for their relative lack of liquidity. Second, since the difference in the yield of short and long term assets reflects asset market frictions, our model predicts a steeper yield curve for assets that trade in less liquid secondary markets. Third, our model predicts that freshly issued (``on-the-run) assets will sell at higher prices than previously issued (``off-the-run) assets that mature in nearby dates, because sellers of the latter have a more urgent need for liquidity.

Analysis of drivers affecting the use of market premium for renewables in Germany

In this paper, we identify and analyze parameters that determine the profitability of wind power operators in the German market premium model. Based on an empirical analysis of different German wind power profiles from 2007 to mid-2012, we are able to show that the profitability significantly depends on the correlation of the wind power portfolio with the overall wind power feed-in and prediction error in Germany. Significant differences between the wind forecast errors clearing cost of the analyzed portfolios can be identified. Our analysis shows that a wind power operator would profit in most cases from a reduced forecast error, which could be achieved through an improved forecast model and an increased share of the intraday cleared error. Furthermore significant locational portfolio advantages and disadvantages can be identified when comparing the different market values. In general, the empirical analysis shows that a premium of 3.5€/MWh is suitable to cover the cost of an imperfect forecast. Taking further into account that for 2012 a premium of 12€/MWh was granted; the direct marketing option can be evaluated as highly attractive, which is furthermore indicated by the rapid increase of the directly marketed wind power and photovoltaic generation.