Jordon E. Swain, Andrew L. Bond and Daniel R. Smith
This article outlines a personal Journey Line Narrative exercise aimed at enhancing leader authenticity and effectiveness by asking students to “look back” and identify their core…
Abstract
This article outlines a personal Journey Line Narrative exercise aimed at enhancing leader authenticity and effectiveness by asking students to “look back” and identify their core values, as well as the formative experiences that helped solidify those values. The Journey Line Narrative encourages reflection and self-awareness by asking students to answer the question “Who am I?”, to articulate this reflection to a mentor, and to distill this reflection into a coherent essay. This exercise can be useful in courses focused on leader development by helping aspiring leaders develop and communicate their authenticity, core values, and purpose
Eduardo Canabarro, Markus Finkemeier, Richard R. Anderson and Fouad Bendimerad
Insurance‐linked securities can benefit both issuers and investors; they supply insurance and reinsurance companies with additional risk capital at reasonable prices (with little…
Abstract
Insurance‐linked securities can benefit both issuers and investors; they supply insurance and reinsurance companies with additional risk capital at reasonable prices (with little or no credit risk), and supply excess returns to investors that are uncorrelated with the returns of other financial assets. This article explains the terminology of insurance and reinsurance, the structure of insurance‐linked securities, and provides an overview of major transactions. First, there is a discussion of how stochastic catastrophe modeling has been applied to assess the risk of natural catastrophes, including the reliability and validation of the risk models. Second, the authors compare the risk‐adjusted returns of recent securitizations on the basis of relative value. Compared with high‐yield bonds, catastrophe (“CAT”) bonds have wide spreads and very attractive Sharpe ratios. In fact, the risk‐adjusted returns on CAT bonds dominate high‐yield bonds. Furthermore, since natural catastrophe risk is essentially uncorrelated with market risk, high expected excess returns make CAT bonds high‐alpha assets. The authors illustrate this point and show that a relatively small allocation of insurance‐linked securities within a fixed income portfolio can enhance the expected return and simultaneously decrease risk, without significantly changing the skewness and kurtosis of the return distribution.
Andrew Kalotay and Leslie Abreo
The volume of municipal bond insurance declined dramatically following the financial crisis of 2008. Insurance now is making a gradual comeback. Two related considerations…
Abstract
Purpose
The volume of municipal bond insurance declined dramatically following the financial crisis of 2008. Insurance now is making a gradual comeback. Two related considerations complicate identification of the best insurance plan. One is the current practice in the municipal market of issuing callable bonds with an above-market coupon; such bonds are very likely to be refunded. The other is that the cost of insurance may depend on when the bonds are refunded. This paper shows how contemporary fixed income analytics can be applied to identifying the best payment plan.
Design/methodology/approach
When the structure of the bond issue is fixed, the benefit from insurance is simply in the increase in proceeds from the better pricing. The debt service is adjusted to incorporate the cashflows associated with insurance. The optimum time of refunding depends on the adjusted cashflows. The effective insurance cost is the difference between the present value of the debt service with and without the adjustment for insurance payments.
Findings
The timing of refunding is a critical determinant of which premium payment plan is the best deal. For a given bond structure, the likelihood of refunding favors plans that are contingent on that event.
Originality/value
The paper proposes an analytically rigorous approach to identifying the most cost-effective bond insurance plan. The findings are relevant to participants in municipal finance, including issuers and their advisors, underwriters and bond insurance companies.
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Wayne Ferson, Darren Kisgen and Tyler Henry
We evaluate the performance of fixed income mutual funds using stochastic discount factors motivated by continuous-time term structure models. Time-aggregation of these models for…
Abstract
We evaluate the performance of fixed income mutual funds using stochastic discount factors motivated by continuous-time term structure models. Time-aggregation of these models for discrete returns generates new empirical “factors,” and these factors contribute significant explanatory power to the models. We provide a conditional performance evaluation for US fixed income mutual funds, conditioning on a variety of discrete ex-ante characterizations of the states of the economy. During 1985–1999 we find that fixed income funds return less on average than passive benchmarks that do not pay expenses, but not in all economic states. Fixed income funds typically do poorly when short-term interest rates or industrial capacity utilization rates are high, and offer higher returns when quality-related credit spreads are high. We find more heterogeneity across fund styles than across characteristics-based fund groups. Mortgage funds underperform a GNMA index in all economic states. These excess returns are reduced, and typically become insignificant, when we adjust for risk using the models.
John F. Sacco and Gerard R. Busheé
This paper analyzes the impact of economic downturns on the revenue and expense sides of city financing for the period 2003 to 2009 using a convenience sample of the audited end…
Abstract
This paper analyzes the impact of economic downturns on the revenue and expense sides of city financing for the period 2003 to 2009 using a convenience sample of the audited end of year financial reports for thirty midsized US cities. The analysis focuses on whether and how quickly and how extensively revenue and spending directions from past years are altered by recessions. A seven year series of Comprehensive Annual Financial Report (CAFR) data serves to explore whether citiesʼ revenues and spending, especially the traditional property tax and core functions such as public safety and infrastructure withstood the brief 2001 and the persistent 2007 recessions? The findings point to consumption (spending) over stability (revenue minus expense) for the recession of 2007, particularly in 2008 and 2009.
DAVID C. CROSON and HOWARD C. KUNREUTHER
This article examines how reinsurance coupled with new financial instruments can expand coverage to areas exposed to catastrophe losses from natural disasters, and demonstrates…
Abstract
This article examines how reinsurance coupled with new financial instruments can expand coverage to areas exposed to catastrophe losses from natural disasters, and demonstrates how reinsurance and the catastrophe‐linked financial instruments can be combined to lower the price of protection from its current level. A simple example illustrates the relative advantages and disadvantages of pure catastrophic bonds and pure indemnity reinsurance in supporting a structure of payments contingent on certain extreme events occurring. The authors suggest ways to combine these two instruments using customized catastrophe indices to expand coverage and reduce the cost of protection. This article states six principles for designing catastrophic risk transfer systems and discusses practical issues for implementation, and then concludes with suggestions for future research.
Peter Smith Ring and Andrew H. Van de Ven
This chapter examines three kinds of relational bonds (trust-based commitments, forbearance-based commitments, and apprehension-based commitments) on which parties rely in the…
Abstract
This chapter examines three kinds of relational bonds (trust-based commitments, forbearance-based commitments, and apprehension-based commitments) on which parties rely in the processes employed in negotiating, committing, and executing their cooperative inter-organizational relationships (CIORs). It also considers three different societal contexts with strong, moderately strong, and weak exogenous governance safeguards in which these relational bonds are employed. The authors propose a process theory of relational bonds that fit different contexts. Specifically, our central proposition is that parties to CIORs are more likely to achieve their goals when they rely on relational bonds that fit their societal contexts in which they engage in economic exchanges.
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Yang Zhao, Jin-Ping Lee and Min-Teh Yu
Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT…
Abstract
Purpose
Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.
Design/methodology/approach
This research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.
Findings
The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.
Originality/value
This research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.
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Jiongyi Yan, Emrah Demirci and Andrew Gleadall
This study/paper aims to develop fundamental understanding of mechanical properties for multiple fibre-reinforced materials by using a single-filament-wide tensile-testing…
Abstract
Purpose
This study/paper aims to develop fundamental understanding of mechanical properties for multiple fibre-reinforced materials by using a single-filament-wide tensile-testing approach.
Design/methodology/approach
In this study, recently validated single-filament-wide tensile-testing specimens were used for four polymers with and without short-fibre reinforcement. Critically, this specimen construct facilitates filament orientation control, for representative longitudinal and transverse composite directions, and enables measurement of interlayer bonded area, which is impossible with “slicing” software but essential in effective property measurement. Tensile properties were studied along the direction of extruded filaments (F) and normal to the interlayer bond (Z) both experimentally and theoretically via the Kelly–Tyson model, bridging model and Halpin–Tsai model.
Findings
Even though the four matrix-material properties varied hugely (1,440% difference in ductility), consistent material-independent trends were identified when adding fibres: ductility reduced in both F- and Z-directions; stiffness and strength increased in F but decreased or remained similar in Z; Z:F strength anisotropy and stiffness anisotropy ratios increased. Z:F strain-at-break anisotropy ratio decreased; stiffness and strain-at-break anisotropy were most affected by changes to F properties, whereas strength anisotropy was most affected by changes to Z properties.
Originality/value
To the best of the authors’ knowledge, this is the first study to assess interlayer bond strength of composite materials based on measured interlayer bond areas, and consistent fibre-induced properties and anisotropy were found. The results demonstrate the critical influence of mesostructure and microstructure for three-dimensional printed composites. The authors encourage future studies to use specimens with a similar level of control to eliminate structural defects (inter-filament voids and non-uniform filament orientation).
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Patricia A. McGraw, Kamphol Panyagometh and Gordon S. Roberts
We extend Diamond's (1989, 1991) life-cycle hypothesis to posit that, once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more…
Abstract
We extend Diamond's (1989, 1991) life-cycle hypothesis to posit that, once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more cheaply at LIBOR as they grow larger, less risky and less characterized by asymmetric information. We conduct multinomial logit regressions to explain firms’ membership in one of three groups: prime only, prime and LIBOR, and LIBOR. We also examine spreads over prime and LIBOR and find that loans set up to allow borrowing at prime carry higher spreads than those allowing borrowing at LIBOR. Both sets of tests support the life-cycle hypothesis.