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Article
Publication date: 17 March 2023

Dila Puspita, Adam Kolkiewicz and Ken Seng Tan

One important study in the portfolio investment is the study of the optimal asset allocations. Markowitz is the pioneer of modern portfolio theory that analyses the performance of…

271

Abstract

Purpose

One important study in the portfolio investment is the study of the optimal asset allocations. Markowitz is the pioneer of modern portfolio theory that analyses the performance of portfolio based on the mean (reward) and variance (risk). Motivated by the Markowitz's mean variance model, the purpose of this paper is to propose a new portfolio optimization model that takes into consideration both processes of purification and screening, which are key to constructing a Shariah-compliant portfolio. In practice, this paper introduces a stochastic purification variable and a probabilistic screening constraint into a portfolio model.

Design/methodology/approach

First, the authors study the stochastic nature of purification variable and apply it to both investment and dividend purification. Second, recognizing that the importance of on-going screening could adversely affect the portfolio strategy, the authors impose probabilistic constraints to control the risk of compliance change. They evaluate the proposed model by formulating the screening constraints at both asset and portfolio levels, together with three different financial screening divisors that are broadly used by the international Shariah boards. The authors also conduct an extensive empirical study using a sample of Shariah-compliant public companies listed on the Indonesia Stock Exchange.

Findings

Based on the empirical example presented in this paper, the authors found that the purification variable in the proposed model is closer to the practice in the Sharia capital market in terms of the nature of the non-constant data, and this variable reduces the total income of portfolio which has not been captured in the previous literature. The authors also have successfully derived the portfolio screening constraint to mitigate the risk of the asset change to be non-compliant in the future.

Originality/value

Based on the authors’ knowledge, this is the first paper that proposed the stochastic purification and the dynamic of screening processes into the Shariah portfolio model. This paper also examines the impact of non-short-selling, purification and screening policies to the performance of Shariah portfolio.

Details

Journal of Islamic Accounting and Business Research, vol. 14 no. 8
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 14 October 2019

Yan Sun and Ken Seng Tan

The purpose of this paper is to propose a new margin protection (MP) scheme for the producers of hog, cattle and dairy in the developing countries.

200

Abstract

Purpose

The purpose of this paper is to propose a new margin protection (MP) scheme for the producers of hog, cattle and dairy in the developing countries.

Design/methodology/approach

The proposed MP scheme is inspired by the Livestock Gross Margin (LGM) program that has been successfully implemented in US directly implementing the LGM program in developing countries can be difficult due to the rudimentary of the futures market with limited futures listing. To address this issue, the authors proxy the futures prices by relating to some relevant spot prices via an econometric model. The proxied futures prices, in turn, enable the implementation of a generalized LGM, which the authors denote as the MP scheme.

Findings

As China is the world’s largest consumption and production of pork, the authors describe the proposed MP scheme by demonstrating how a generalized LGM can be constructed for the Chinese hog producers. By empirically comparing to the pilot hog price index insurance for the Beijing’s hog producers, the authors find that the proposed MP scheme is more effective in providing MP for the producers.

Research limitations/implications

The proposed MP scheme still requires the availability of some relevant spot prices in order to use an econometric model to proxy the missing futures prices.

Originality/value

The value of this research stems from demonstrating how an MP scheme can be constructed for developing countries that have rudimentary futures markets.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 9 no. 5
Type: Research Article
ISSN: 2044-0839

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Article
Publication date: 19 July 2018

Wenjun Zhu, Lysa Porth and Ken Seng Tan

The purpose of this paper is to propose an improved reinsurance pricing framework, which includes a crop yield forecasting model that integrates weather variables and crop…

468

Abstract

Purpose

The purpose of this paper is to propose an improved reinsurance pricing framework, which includes a crop yield forecasting model that integrates weather variables and crop production information from different geographically correlated regions using a new credibility estimator, and closed form reinsurance pricing formulas. A yield restatement approach to account for changing crop mix through time is also demonstrated.

Design/methodology/approach

The new crop yield forecasting model is empirically analyzed based on detailed farm-level data from Manitoba, Canada, covering 216 crop varieties from 19,238 farms from 1996 to 2011. As well, corresponding weather data from 30 stations, including daily temperature and precipitation, are considered. Algorithms that combine screening regression, cross-validation and principal component analysis are evaluated for the purpose of achieving efficient dimension reduction and model selection.

Findings

The results show that the new yield forecasting model provides significant improvements over the classical regression model, both in terms of in-sample and out-of-sample forecasting abilities.

Research limitations/implications

The empirical analysis is limited to data from the province of Manitoba, Canada, and other regions may show different results.

Practical implications

This research is useful from a risk management perspective for insurers and reinsurers, and the framework may also be used to develop improved weather risk management strategies to help manage adverse weather events.

Originality/value

This is the first paper to integrate a credibility estimator for crop yield forecasting, and develop a closed form reinsurance pricing formula.

Details

Agricultural Finance Review, vol. 79 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

Available. Content available
757

Abstract

Details

Agricultural Finance Review, vol. 74 no. 2
Type: Research Article
ISSN: 0002-1466

Available. Content available
542

Abstract

Details

Agricultural Finance Review, vol. 76 no. 1
Type: Research Article
ISSN: 0002-1466

Available. Content available
Article
Publication date: 5 May 2015

Assistant Professor Lysa Porth and Professor ßKen Seng Tan

29

Abstract

Details

Agricultural Finance Review, vol. 75 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 26 July 2013

Lysa Porth, Ken Seng Tan and Chengguo Weng

The purpose of this paper is to analyze the optimal reinsurance contract structure from the crop insurer's perspective.

533

Abstract

Purpose

The purpose of this paper is to analyze the optimal reinsurance contract structure from the crop insurer's perspective.

Design/methodology/approach

A very powerful and flexible empirical‐based reinsurance model is used to analyze the optimal form of the reinsurance treaty. The reinsurance model is calibrated to unique data sets, including private reinsurance experience for Manitoba, and loss cost ratio (LCR) experience for all of Canada, under the assumption of the standard deviation premium principle and conditional tail expectation risk measure.

Findings

The Vasicek distribution is found to provide the best statistical fit for the Canadian LCR data, and the empirical reinsurance model stipulates that a layer reinsurance contract structure is optimal, which is consistent with market practice.

Research limitations/implications

While the empirical reinsurance model is able to reproduce the optimal shape of the reinsurance treaty, the model produces some inconsistencies between the implied and observed attachment points. Future research will continue to explore the reinsurance model that will best recover the observed market practice.

Practical implications

Private reinsurance premiums can account for a significant portion of a crop insurer's budget, therefore, this study should be useful for crop insurance companies to achieve efficiencies and improve their risk management.

Originality/value

To the best of the authors' knowledge, this is the first paper to show how a crop insurance firm can optimally select a reinsurance contract structure that minimizes its total risk exposure, considering the total losses retained by the insurer, as well as the reinsurance premium paid to private reinsurers.

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Article
Publication date: 1 July 2014

Lysa Porth, Wenjun Zhu and Ken Seng Tan

The purpose of this paper is to address some of the fundamental issues surrounding crop insurance ratemaking, from the perspective of the reinsurer, through the development of a…

484

Abstract

Purpose

The purpose of this paper is to address some of the fundamental issues surrounding crop insurance ratemaking, from the perspective of the reinsurer, through the development of a scientific pricing framework.

Design/methodology/approach

The generating process of the historical loss cost ratio's (LCR's) are reviewed, and the Erlang mixture distribution is proposed. A modified credibility approach is developed based on the Erlang mixture distribution and the liability weighted LCR, and information from the observed data of the individual region/province is integrated with the collective experience of the entire crop reinsurance program in Canada.

Findings

A comprehensive data set representing the entire crop insurance sector in Canada is used to show that the Erlang mixture distribution captures the tails of the data more accurately compared to conventional distributions. Further, the heterogeneous credibility premium based on the liability weighted LCR's is more conservative, and provides a more scientific approach to enhance the reinsurance pricing.

Research limitations/implications

Credibility models are in the early stages of application in the area of agriculture insurance, therefore, the credibility models presented in this paper could be verified with data from other geographical regions.

Practical implications

The credibility-based Erlang mixture model proposed in this paper should be useful for crop insurers and reinsurers to enhance their ratemaking frameworks.

Originality/value

This is the first paper to introduce the Erlang mixture model in the context of agricultural risk modeling. Two modified versions of the Bühlmann-Straub credibility model are also presented based on the liability weighted LCR to enhance the reinsurance pricing framework.

Details

Agricultural Finance Review, vol. 74 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

Available. Content available
Article
Publication date: 29 February 2008

603

Abstract

Details

The Journal of Risk Finance, vol. 9 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 29 October 2020

Rong Kong, Yanling Peng, Nan Meng, Hong Fu, Li Zhou, Yuehua Zhang and Calum Greig Turvey

In this study, the authors examined demand-side credit in rural China with the aims of understanding attribute preferences and the willingness of farmers to pay for credit.

489

Abstract

Purpose

In this study, the authors examined demand-side credit in rural China with the aims of understanding attribute preferences and the willingness of farmers to pay for credit.

Design/methodology/approach

The authors implemented an in-the-field discrete choice experiment (DCE) using a D-optimal block (6 × 9 × 3) design applied to 420 farm households across five Chinese provinces (Shandong, Sichuan, Shaanxi, Jiangsu and Henan) in the summer and fall of 2018. The DCE included six attributes including the interest rate, term of loan, type of loan, type of repayment, type of institution and mobile banking services.

Findings

Conditional and mixed logit results indicated a downward sloping credit demand curve with variable elasticity across regions. Provincial willingness-to-pay (WTP) indicators suggested that farmers were willing to pay a premium for long-term ( 0.03–0.687%) and low collateral credit loans ( 0.79–2.93%). Also, four of five provinces indicated a preference for loan amortization rather than lump-sum payment. Interestingly, in comparison to the Agricultural Bank of China (ABC), only farmers in Shandong, Sichuan and Shaanxi indicated a preference for rural credit cooperatives (RCCs)/banks and the Postal Savings Bank of China (PSBC). Another quite surprising result was bank services, in our case, access to mobile banking did not appear to induce WTP for agricultural credit. While conditional and mixed logit regression coefficients were similar (and therefore robust), the authors found that there was substantial heterogeneity across attribute preferences on term of loan, type of loan and amortization. Preferences for type of lender and mobile banking were generally homogenous. This result alone suggested that lenders should consider offering a suite of credit products with different attributes in order to maximize the potential pool of borrowers. While there were some differences across provinces, farmers appeared to be indifferent to lenders, and it did not appear that offering banking services such as mobile banking had any bearing on credit decisions.

Research limitations/implications

This paper presents a first step in using in-the-field choice experiments to better understand rural finance in China. Although the sample size satisfies conventional levels of significance and rank conditions, the authors caution against attributing results to China as a whole. Different provinces have different institutional structures and agricultural growing conditions and economies and these effects may differentially affect WTP for credit. Although by all indications farmers were aware of credit, not all farmers, in fact a minority, actually borrowed from a financial institution. This is not unusual in China, but for these farmers, the DCE was posed as hypothetical. Likewise, the study’s design was based on a generic credit product typical of rural China, and the authors caution against making inferences about other products with different attributes and risk structures.

Social implications

This study is motivated by the rapidly changing dynamic in China's agricultural economy. With specific reference to new laws and regulations about the transfer of land use rights (LURs), China's agricultural economy is undergoing significant and rapid change which will require better understanding by policy makers, lenders and practitioners of the changing credit needs of farmers, including the new and emerging class of commercial farmers.

Originality/value

To the best of the authors’ knowledge, the authors believe that the result provided in this paper present the first use of in-the-field DCE and are the first to be reported in either the English or Chinese literature on rural credit product design.

Details

China Agricultural Economic Review, vol. 13 no. 2
Type: Research Article
ISSN: 1756-137X

Keywords

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