scholarly journals Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Risks ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 60
Author(s):  
Cláudia Simões ◽  
Luís Oliveira ◽  
Jorge M. Bravo
Keyword(s):  
Interest Rate ◽  
Yield Curve ◽  
Risk Measure ◽  
Management Strategies ◽  
Interest Rate Risk ◽  
Insurance Companies ◽  
Retirement Income ◽  
Investment Strategies ◽  
Immunization Strategies ◽  
The Impact

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies.

Does the impact of the COVID-19 pandemic influence the FX? A note.

2021 ◽  
Vol 15 (2) ◽  
Author(s):  
Evangelos Vasileiou
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Economic Recession ◽  
Interest Rate Risk ◽  
Economic Consequences ◽  
Domestic Currency ◽  
Effective Response ◽  
Policy Makers ◽  
The Cost ◽  
The Impact

This note shows that the effective response of a country in its battle against COVID-19 influences the exchange rate of its currency. Particularly, we examine the GBPUSD, AUDUSD and AUDGBP pairs of currency during the COVID-19 outbreak and the results show that the domestic currency of the country which documents more COVID-19 cases in each pair is depreciated against the foreign one. Therefore, a country which cannot effectively mitigate the impact of COVID-19 and whose currency is depreciated may present further economic consequences in the future. Such consequences extend beyond economic recession and may include sovereign and interest rate risk. These findings may be useful for policy makers in order to estimate the cost of the pandemic.

scholarly journals Mechanisms of Protection from Interest Rate Risk with Reference to the Life Insurance Market in Montenegro

2018 ◽  
Vol 7 (1) ◽  
pp. 17-42
Author(s):  
Milijana Novović Burić ◽  
Vladimir Kašćelan ◽  
Milivoje Radović ◽  
Ana Lalević Filipović
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Life Insurance ◽  
Financial Management ◽  
Financial Stability ◽  
Interest Rate Risk ◽  
Economic Security ◽  
Insurance Market ◽  
Insurance Companies ◽  
Rate Risk

Abstract Insurance companies are facing major challenges that point to the need for control process and risk management. Risk management in insurance has a direct impact on solvency, economic security, and overall financial stability of insurance companies. It is very important for insurance companies to adequately calculate risks to which they are exposed. Asset liability management (ALM), as an integrated approach to financial management, requires simultaneous decision-making about categories and values of assets and liabilities in order to establish the optimum volume and the ratio of assets and liabilities, with the understanding of complexity of the financial market in which financial institutions operate. ALM focuses on a significant number of risks, whereby the emphasis in this paper will be on interest rate risk which indicates potential losses that may reflect in a lower interest margin, a lower value of assets or both, in terms of changes in interest rates. In the above context, the aim of this paper is to show how to protect from interest rate changes and how these changes influence the insurance market in Montenegro, both from the theoretical and the practical point of view. The authors consider this to be an interesting and very important topic, especially because the life insurance market in Montenegro is underdeveloped and subject to fluctuations. Also, taking into account the fact that Montenegro is a country that has been making serious efforts to join the EU, it is expected that insurance companies in Montenegro will strengthen their financial position in the market even using the ALM traditional techniques, which is shown in this paper.

scholarly journals The Effect of Risks on Banking Safety: Applied Study on Jordanian Traditional Banks (2005-2016)

2017 ◽  
Vol 9 (9) ◽  
pp. 102
Author(s):  
Mohammad Abdel Mohsen Al-Afeef ◽  
Atallah Hassan Al-Ta'ani
Keyword(s):  
Interest Rate ◽  
Credit Risk ◽  
Commercial Banks ◽  
Banking Sector ◽  
Liquidity Risk ◽  
Interest Rate Risk ◽  
Bank Credit ◽  
Applied Study ◽  
Rate Risk ◽  
The Impact

Banking sector is one of the most important sectors that support the sustainable economic development in Jordan, therefore this study aimed to test the impact of risks; (Liquidity risk, bank credit risk and interest rate risk) on the safety in the banking sector in the Jordanian commercial banks during the period 2005-2016.The results of the study showed that there is a statistically significant impact for each of liquidity risk and interest rate risk on the safety in the banking sector, and there isn't statistically significant impact for credit risk on the safety in the banking sector during the period of this study, and also find that the explanatory of model was 60.5%, which means that 39.5% due to other factors.

Interest Rate Risk and Equity Values of Life Insurance Companies: A GARCH?M Model

2007 ◽  
Vol 74 (2) ◽  
pp. 401-423 ◽  
Author(s):  
Elijah Brewer ◽  
James M. Carson ◽  
Elyas Elyasiani ◽  
Iqbal Mansur ◽  
William L. Scott
Keyword(s):  
Interest Rate ◽  
Life Insurance ◽  
Interest Rate Risk ◽  
Insurance Companies ◽  
Equity Values ◽  
Rate Risk

scholarly journals INTEREST RATE RISK IN TURKISH FINANCIAL MARKETS ACROSS DIFFERENT TIME PERIODS

2014 ◽  
Vol 16 (3) ◽  
pp. 183-204
Author(s):  
Durmus Özdemir ◽  
Harald Schmidbauer
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Stock Exchange ◽  
Risk Measure ◽  
Generalized Pareto Distribution ◽  
Interest Rate Risk ◽  
Negative Effects ◽  
Good Tool ◽  
Generalized Pareto ◽  
Rate Risk

A Measuring the risk associated with interest rates is important since it is beneficial in taking measures before negative effects can take place in an economy. We obtain a risk measure for interest rates by fitting the generalized Pareto distribution (GPD) to positive extreme day-to-day changes of the interest rate, using data from the Istanbul Stock Exchange (ISE) Second Hand Bond Market, namely Government Bond interest rate closing quotations, for the time period 2001 through 2009. Although the use of the GPD in the context of absolute interest rates is well  ocumented in literature, our approach is different insofar and contributes to the literature as changes in interest rates constitute the target of our analysis, reflecting the idea that risk arises from abrupt changes in interest rate rather than in interest rate levels themselves. Our study clearly shows that the GPD, when applied to interest rate changes, provides a good tool for interest rate risk assessment, and permit a period-specific risk evaluation.  Keyword: Interest rate risk; covered interest parity; Turkey; generalized Pareto distributionJEL Classification: G1; C1

Scenario-based measurement of interest rate risks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sebastian Schlütter
Keyword(s):  
At Risk ◽  
Interest Rate ◽  
Stochastic Model ◽  
Interest Rates ◽  
Lower Bounds ◽  
Value At Risk ◽  
Yield Curve ◽  
Principal Component ◽  
Insurance Companies ◽  
Content Type

PurposeThis paper aims to propose a scenario-based approach for measuring interest rate risks. Many regulatory capital standards in banking and insurance make use of similar approaches. The authors provide a theoretical justification and extensive backtesting of our approach.Design/methodology/approachThe authors theoretically derive a scenario-based value-at-risk for interest rate risks based on a principal component analysis. The authors calibrate their approach based on the Nelson–Siegel model, which is modified to account for lower bounds for interest rates. The authors backtest the model outcomes against historical yield curve changes for a large number of generated asset–liability portfolios. In addition, the authors backtest the scenario-based value-at-risk against the stochastic model.FindingsThe backtesting results of the adjusted Nelson–Siegel model (accounting for a lower bound) are similar to those of the traditional Nelson–Siegel model. The suitability of the scenario-based value-at-risk can be substantially improved by allowing for correlation parameters in the aggregation of the scenario outcomes. Implementing those parameters is straightforward with the replacement of Pearson correlations by value-at-risk-implied tail correlations in situations where risk factors are not elliptically distributed.Research limitations/implicationsThe paper assumes deterministic cash flow patterns. The authors discuss the applicability of their approach, e.g. for insurance companies.Practical implicationsThe authors’ approach can be used to better communicate interest rate risks using scenarios. Discussing risk measurement results with decision makers can help to backtest stochastic-term structure models.Originality/valueThe authors’ adjustment of the Nelson–Siegel model to account for lower bounds makes the model more useful in the current low-yield environment when unjustifiably high negative interest rates need to be avoided. The proposed scenario-based value-at-risk allows for a pragmatic measurement of interest rate risks, which nevertheless closely approximates the value-at-risk according to the stochastic model.

Risk Management Strategies in International Markets

2020 ◽  
pp. 27-52
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Management Strategies ◽  
International Markets ◽  
Interest Rate Risk ◽  
Operating Cycle ◽  
Credit Risks ◽  
Financial Costs ◽  
Risk Management Strategies ◽  
Exchange Risk

On an operational level, companies with processes of internationalization are confronted with credit risks, interest rate risks, and foreign exchange risks in trade and financial operations that they perform daily within their operating cycle, transforming sometimes great opportunities into financial catastrophes. As these risks strongly affect companies' normal activities in international markets through higher financial costs arising from receipts that don't occur, from unfavorable exchange differences or negative evolution's in the interest rates, different strategies to manage these risks will next be addressed. At first, the payment techniques and sources of financing in international trade that allow to mitigate the credit risk and to protect the company's treasury will be presented. Then, the techniques to hedge exchange risk and interest rate risk will be studied to highlight how they could improve the international businesses' margins.

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