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Stock index futures and index arbitrage in a rational expectations model
76
Abstracts and Reviews
a social management policy are recognized as main fields of future cooperation between economic science and practice. (Author) Keywords: Economic Research, Models. 051037 (ElO) Insurance economics between theoretical pretense and empirical relevance (VersicherungsBkonomie xwischen theoretischem Anspruch und empirischer Relevanz) . Helten E., Miinich, Germany, Zeitschrift fiir die gesamte Versicherungswissenschafr, Vol. 79, 1990, pp. 359-3 74. Insurance economics claim to give not only descriptions of the evidence of insurance practice but explanations which can be used as a basis for decisions in insurance practice. This claim cannot be achieved by adjusting models and methods of general economic theory to questions of insurance economics, but their relevance must be proved by empirical data. Such empirical relevance tests have only been achieved in very few cases. It is, therefore, necessary to present and describe the epistemological position of insurance economics as a Real Theory (or empirical theory) of insurance, and to describe the way by which through an empirical approach to insurance economics the discrepancy between insurance economics and the practice of insurance can be reduced. Starting from as yet unpublished investigations the contribution of empirical research to the solution of practical problems is demonstrated. Passing in review, the last five years’ publications of the leading German insurance journals and the Geneva Papers, it appears that very few investigations have reached the aim of the real theory of insurance economics. (Author) Insurance Economics, Empirical Keywords: Approach. 051038 (ElO) The product Insurance (Das Versicherungsprodukt). Riege J., Lilneburg, Germany, Zeitschrifr fur die gesamte Versicherungswissenschafl, Vol. 79, 1990, pp. 403-470. Basic features of the product ‘insurance’ are often unknown to the insured and are still subject to discussion in insurance sciences. Given this situation,
the aim of the article is to describe and explain characteristics of the product fundamental ‘insurance’. To this end, the product 2nsurance’ is divided into the components ‘core-product’, which comprehends basic and supplementary functions, and ‘service’. Each component is described and explained by the answers to two questions: “which is the usefulness that the component incorporates?” and “how is the component produced?” (Author) Keywords: Core-product, Service. 051039 (ElO, M20) Empirical tests of the bias and efficiency of the extreme-value variance estimator for common stocks. Wiggins J.B., Journal of Business, Vol. 44, nr. 3, 1991, pp. 417-438. This article examines the empirical bias and efficiency of Parkinson’s extreme-value variance estimator for common stocks using an extensive NYSE/AMEX data base. Bias and efficiency are analyzed as a function of stock price level and trading volume. The results are sensitive to outliers in daily high and low prices. After an outlier screen is applied to the data, the efficiency of the extremevalue estimator significantly exceeds that of the close-close estimator for most price and volume groups. (Author) Keywords: Parkinson ‘s Extreme Value Variance, Common Stocks, Outliers. 051040 (ElO) Stock index futures and index arbitrage in a rational expectations model. Fremault A., Boston University, USA, Journal of Business, Vol. 64, nr. 4, 1991, pp. 523-547. This article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and future markets. A simple model is developed with three types of agents who, besides having different trading motives, have unequal access to markets. Among these agents, only index arbitrageurs can trade on both markets The article and thus engage in arbitrage. characterizes the impact of index arbitrage on equilibrium prices, volatilities, and welfare. It is shown that index arbitrage is a risk-reallocating and price-correcting mechanism. Its impact on price
Abstracts and Reviews stability is shown to be dependent on the relative variability of aggregate supply in the respective markets. Index arbitrage also transmits information across markets. (Author) Keywords: Stock Index, Rational Expectations. 051041 (ElO) Naive trading rules in financial markets and
Wiener-Kohnogorov prediction theory: A study of “technical analysis”. Neftci S.N., Graduate School, City University of New York, USA, Journal of Business, Vol. 64, nr. 4, 1991, pp. 549-571. This article attempts a formal study of technical analysis, which is a class of informal prediction rules, often preferred to Wiener-Kolmogorov prediction theory by participants of financial markets. Yet Wiener-Kolmogorov prediction theory provides optimal linear forecasts. This article investigates two issues that may explain this contradiction. First this article attempts to devise formal algorithms to represent various forms of technical analysis in order to see if these rules are well defined. Second, the article discusses under which conditions (if any) technical analysis might capture those properties of stock prices left unexploited by linear models of Wiener-Kolmogorov theory. (Author) Keywords: Wiener-Kolmogorov Prediction Theory, Stock Prices.
EZ2:
UTILITY
THEORY
051042 (E12) The law of large (small?) numbers and the demand for insurance. Eeckhoudt L., Bauwens L., Briys E., Scarmure P., Belgium, Journal of Risk and Insurance, Vol. 18, nr. 3, 1991, pp. 438-451. Using an expected utility approach the effect of ‘risk subdividing’ on insurance demand is analysed. The results indicate that when the total property at risk is scattered only on a small number of pieces (with independent risks), risk retention becomes very attractive relatively to market insurance with a positive loading. (Author) Keywords: Utility theory, Retention.
77
EZ3: PORTFOLIO THEORY 051043 (E13) Risk loads for insurers. Feldblum S., Proceedings of the Casualty Actuarial Society, Vol. LXXVII, 1990, pp. 160-195. Insurance companies are risk averse, even as individuals are. Casualty actuaries have suggested several methods of calculating risk loads to compensate the insurer for the risk it accepts. Methods currently in use, and reviewed in this paper, consider (a) the standard deviation and variance of the loss distribution, (b) utility functions, (c) the probability of ruin, and (d) reinsurance costs. These methods are theoretically unsound. They consider the wrong type of risk, they arbitrarily equate risk with a mathematically more tractable variable; and they require equally arbitrary assumptions about an insurer’s aversion to risk. More importantly, they concentrate on the size of loss distribution, though the true risk to the insurance company resides in profit fluctuations. Modem portfolio theory measures the risk assumed by investors in securities. Systematic risk, the overall risk faced by a diversified stock portfolio, requires an additional premium. Firm-specific risk, or the fluctuations in an individual stock’s price, can be eliminated by diversification and is not compensated for in security returns. Insurance equivalents to modem portfolio theory can be applied to insurance portfolios to determine risk premiums by line of business. Such analysis reveals the Commercial Liability lines to be highly risky and the Personal Property lines to be less risky. In sum, this method allows insurers to measure the true risk they face in each line of business. (Author) Keyword: Risk Loa&, Portfolio lheory. 051044 (E13)
Stock price movements around acquisition announcements and management’s response. Jennings R.H., Mazzeo M.A., Indiana University, Michigan State University, Journal of Business, Vol. 64, 1991, nr. 2, pp. 139-163. Whether management employs security price changes as information depends on its assessment of the accuracy of the information set held by the market participants. Managers may possess proprietary data providing them with a statistically
Abstracts and Reviews
a social management policy are recognized as main fields of future cooperation between economic science and practice. (Author) Keywords: Economic Research, Models. 051037 (ElO) Insurance economics between theoretical pretense and empirical relevance (VersicherungsBkonomie xwischen theoretischem Anspruch und empirischer Relevanz) . Helten E., Miinich, Germany, Zeitschrift fiir die gesamte Versicherungswissenschafr, Vol. 79, 1990, pp. 359-3 74. Insurance economics claim to give not only descriptions of the evidence of insurance practice but explanations which can be used as a basis for decisions in insurance practice. This claim cannot be achieved by adjusting models and methods of general economic theory to questions of insurance economics, but their relevance must be proved by empirical data. Such empirical relevance tests have only been achieved in very few cases. It is, therefore, necessary to present and describe the epistemological position of insurance economics as a Real Theory (or empirical theory) of insurance, and to describe the way by which through an empirical approach to insurance economics the discrepancy between insurance economics and the practice of insurance can be reduced. Starting from as yet unpublished investigations the contribution of empirical research to the solution of practical problems is demonstrated. Passing in review, the last five years’ publications of the leading German insurance journals and the Geneva Papers, it appears that very few investigations have reached the aim of the real theory of insurance economics. (Author) Insurance Economics, Empirical Keywords: Approach. 051038 (ElO) The product Insurance (Das Versicherungsprodukt). Riege J., Lilneburg, Germany, Zeitschrifr fur die gesamte Versicherungswissenschafl, Vol. 79, 1990, pp. 403-470. Basic features of the product ‘insurance’ are often unknown to the insured and are still subject to discussion in insurance sciences. Given this situation,
the aim of the article is to describe and explain characteristics of the product fundamental ‘insurance’. To this end, the product 2nsurance’ is divided into the components ‘core-product’, which comprehends basic and supplementary functions, and ‘service’. Each component is described and explained by the answers to two questions: “which is the usefulness that the component incorporates?” and “how is the component produced?” (Author) Keywords: Core-product, Service. 051039 (ElO, M20) Empirical tests of the bias and efficiency of the extreme-value variance estimator for common stocks. Wiggins J.B., Journal of Business, Vol. 44, nr. 3, 1991, pp. 417-438. This article examines the empirical bias and efficiency of Parkinson’s extreme-value variance estimator for common stocks using an extensive NYSE/AMEX data base. Bias and efficiency are analyzed as a function of stock price level and trading volume. The results are sensitive to outliers in daily high and low prices. After an outlier screen is applied to the data, the efficiency of the extremevalue estimator significantly exceeds that of the close-close estimator for most price and volume groups. (Author) Keywords: Parkinson ‘s Extreme Value Variance, Common Stocks, Outliers. 051040 (ElO) Stock index futures and index arbitrage in a rational expectations model. Fremault A., Boston University, USA, Journal of Business, Vol. 64, nr. 4, 1991, pp. 523-547. This article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and future markets. A simple model is developed with three types of agents who, besides having different trading motives, have unequal access to markets. Among these agents, only index arbitrageurs can trade on both markets The article and thus engage in arbitrage. characterizes the impact of index arbitrage on equilibrium prices, volatilities, and welfare. It is shown that index arbitrage is a risk-reallocating and price-correcting mechanism. Its impact on price
Abstracts and Reviews stability is shown to be dependent on the relative variability of aggregate supply in the respective markets. Index arbitrage also transmits information across markets. (Author) Keywords: Stock Index, Rational Expectations. 051041 (ElO) Naive trading rules in financial markets and
Wiener-Kohnogorov prediction theory: A study of “technical analysis”. Neftci S.N., Graduate School, City University of New York, USA, Journal of Business, Vol. 64, nr. 4, 1991, pp. 549-571. This article attempts a formal study of technical analysis, which is a class of informal prediction rules, often preferred to Wiener-Kolmogorov prediction theory by participants of financial markets. Yet Wiener-Kolmogorov prediction theory provides optimal linear forecasts. This article investigates two issues that may explain this contradiction. First this article attempts to devise formal algorithms to represent various forms of technical analysis in order to see if these rules are well defined. Second, the article discusses under which conditions (if any) technical analysis might capture those properties of stock prices left unexploited by linear models of Wiener-Kolmogorov theory. (Author) Keywords: Wiener-Kolmogorov Prediction Theory, Stock Prices.
EZ2:
UTILITY
THEORY
051042 (E12) The law of large (small?) numbers and the demand for insurance. Eeckhoudt L., Bauwens L., Briys E., Scarmure P., Belgium, Journal of Risk and Insurance, Vol. 18, nr. 3, 1991, pp. 438-451. Using an expected utility approach the effect of ‘risk subdividing’ on insurance demand is analysed. The results indicate that when the total property at risk is scattered only on a small number of pieces (with independent risks), risk retention becomes very attractive relatively to market insurance with a positive loading. (Author) Keywords: Utility theory, Retention.
77
EZ3: PORTFOLIO THEORY 051043 (E13) Risk loads for insurers. Feldblum S., Proceedings of the Casualty Actuarial Society, Vol. LXXVII, 1990, pp. 160-195. Insurance companies are risk averse, even as individuals are. Casualty actuaries have suggested several methods of calculating risk loads to compensate the insurer for the risk it accepts. Methods currently in use, and reviewed in this paper, consider (a) the standard deviation and variance of the loss distribution, (b) utility functions, (c) the probability of ruin, and (d) reinsurance costs. These methods are theoretically unsound. They consider the wrong type of risk, they arbitrarily equate risk with a mathematically more tractable variable; and they require equally arbitrary assumptions about an insurer’s aversion to risk. More importantly, they concentrate on the size of loss distribution, though the true risk to the insurance company resides in profit fluctuations. Modem portfolio theory measures the risk assumed by investors in securities. Systematic risk, the overall risk faced by a diversified stock portfolio, requires an additional premium. Firm-specific risk, or the fluctuations in an individual stock’s price, can be eliminated by diversification and is not compensated for in security returns. Insurance equivalents to modem portfolio theory can be applied to insurance portfolios to determine risk premiums by line of business. Such analysis reveals the Commercial Liability lines to be highly risky and the Personal Property lines to be less risky. In sum, this method allows insurers to measure the true risk they face in each line of business. (Author) Keyword: Risk Loa&, Portfolio lheory. 051044 (E13)
Stock price movements around acquisition announcements and management’s response. Jennings R.H., Mazzeo M.A., Indiana University, Michigan State University, Journal of Business, Vol. 64, 1991, nr. 2, pp. 139-163. Whether management employs security price changes as information depends on its assessment of the accuracy of the information set held by the market participants. Managers may possess proprietary data providing them with a statistically