The Demand for Risky Assets

Friend, Irwin

doi:10.1016/b978-0-12-445850-5.50008-8

Cited by 669 publications

(510 citation statements)

References 5 publications

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“…1970. 1975, 1980and 1985 almost a straight line between these observations for most countries we believe very little information is lost in doing so.…”

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confidence: 85%

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Growth uncertainty and risksharing

Athanasoulis

Wincoop

2000

Journal of Monetary Economics

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How large are potential benefits from global risksharing? In order to answer this question we propose a new methodology that is closely connected with the empirical growth literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific growth in deviation from, world growth on a wide set of variables in the information set. Since this residual risk can be entirely hedged through risksharing, we use it to obtain a measure of the potential welfare gain'for' a representative country. We find that nations can reap very large benefits from, engaging in such risksharing arrangements. We would like to thank Richard Easterlin for his help in obtaining the fertility data. We literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific growth in deviation from, world growth on a wide set of vari.ables in the information set. Since this residual risk can be entirely hedged through ri-sksharing, we use it to obtain a measure of the potential welfare gain' for' a representative country. We find that nations can reap very large benefits from, engaging in such risksharing arrangements. Using post-war data, the gain for a 35-year horizon, corresponding to an equivalent permanent increase in consumption, is 6.6% when based on a set of 49 countries, and 1.5% when based on 21 OECD countri.es. Using historical data from. 1870 to 1990, we find that the potential gain for a 120-year hori.zon ranges from. 4-9% for a small set of ri.ch countri.es to 16.5% for a broad set of 24 countri.es. Disciplines

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“…1970. 1975, 1980and 1985 almost a straight line between these observations for most countries we believe very little information is lost in doing so.…”

mentioning

confidence: 85%

“…This is the average of estimates in Friend and Blume [1975]. We consider it to be a good consensus estimate overall.…”

Section: Estimation Of the Growth Regressionmentioning

confidence: 99%

Growth uncertainty and risksharing

Athanasoulis

Wincoop

2000

Journal of Monetary Economics

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“…We know that individual risk preferences differ with wealth (see, for example, Friend andBlume (1975), Weber, (1975), Hansen and Singleton (1983), Mankiw (1985), and Szpiro (1986)). Evidence suggests that women are more risk averse than men (see, for example, Levin, Snyder, and Chapman (1988), Powell and Ansic (1997), Jiankoplos and Bernasek (1998), Sunden andSurette (1998), Schubert (1999), and Haleck and Eisenhauer (2001)).…”

Section: Modelmentioning

confidence: 99%

Risk Aversion, Negotiation, and Claims Settlement Strategies

2005

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We examine the optimal claims settlement strategy for a liability insurer negotiating with classes of claimants who differ in risk attitude and negotiating skill. Our model demonstrates that a profit-maximizing insurer will be systematically less generous in claims payment to claimants who are more risk averse and who experience greater negotiating costs. We test our theory empirically using the 1997 Insurance Research Council automobile claims data. Following the existing literature we use claimant gender and age to identify classes of claimants with different risk preferences and negotiation costs. Empirical analysis is consistent with systematically less generous payment to claimants in those classes.3 Risk Aversion, Negotiation, and Claims Settlement Strategies

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“…See, for example, the well-cited article by Friend and Blume (1975), as well as the more recent Mitchell et al (1999), Feldstein and Ranguelova (2001), Cochrane (2001), and Campbell and Viceira (2002).…”

Section: Definition Of the Value Functionsmentioning

confidence: 99%

Optimal surrender strategies for equity-indexed annuity investors

Moore

2009

Insurance: Mathematics and Economics

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An equity-indexed annuity (EIA) is a hybrid between a variable and a fixed annuity that allows the investor to participate in the stock market and earn at least a minimum interest rate. The investor sacrifices some of the upside potential for the downside protection of the minimum guarantee. Because EIAs allow investors to participate in equity growth without the downside risk, their popularity has grown rapidly.An optimistic EIA owner might consider surrendering an EIA contract, paying a surrender charge, and investing the proceeds directly in the index to earn the full (versus reduced) index growth, while using a risk-free account for downside protection. Because of the popularity of these products, it is important for individuals and insurers to understand the optimal policyholder behavior.We consider an EIA investor who seeks the surrender strategy and post-surrender asset allocation strategy that maximize the expected discounted utility of bequest. We formulate a variational inequality and a Hamilton-Jacobi-Bellman equation that govern the optimal surrender strategy and post-surrender asset allocation strategy, respectively. We examine the optimal strategies and how they are affected by the product features, model parameters, and mortality assumptions. We observe that in many cases, the "no-surrender" region is an interval (w l , w u ); i.e., that there are two free boundaries. In these cases, the investor surrenders the EIA contract if the fund value becomes too high or too low. In other cases, there is only one free boundary; the lower (or upper) surrender threshold vanishes. In these cases, the investor holds the EIA, regardless of how low (or high) the fund value goes. For a special case, we prove a succinct and intuitive condition on the model parameters that dictates whether one or two free boundaries exist.

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The Demand for Risky Assets

Cited by 669 publications

References 5 publications

Growth uncertainty and risksharing

Growth uncertainty and risksharing

Risk Aversion, Negotiation, and Claims Settlement Strategies

Optimal surrender strategies for equity-indexed annuity investors

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