Finance and Insurance Seminar SS 2014
Jeweils Donnerstags, 12.00-13.00 Uhr in der Faculty Lounge
Alexander Szimayer: "Blockholder Risk-Taking and Private Benefits of Control: A Game-Theoretic Model" (joint with Rainer Volk)
Abstract: In order to secure private and shared benefits, investors hold substantial quantity of shares in an independent legal entity. Thus, these blockholders are exposed to non-diversifiable risk and have major interests in controlling their investment. The blockholder is able to influence the risk of his investment by relinquishing parts of his own private benefits and granting concessions to all shareholders of the corresponding company. To investigate the incentive mechanisms of the described setting, we formulate a stochastic differential game of Stackelberg type in continuous time between the two parties. At the Stackelberg equilibrium, we derive closed form solutions for the blockholder’s optimal share in the corresponding company as well as for the optimal risk strategy of the latter.
Jing Li: “Early Default Risk and Surrender Risk: Impacts on Participating Life Insurance Policies” (joint with Chunli Cheng)
Abstract: We study the fair valuation of participating life insurance policies with surrender guarantees when an early default regulatory mechanism forces an insurance company to be liquidated once a solvency threshold is reached before maturity. We uncover the impacts of the regulation on the policyholders' surrender decision under the assumption that a representative policyholder's surrender intensity is bounded from below and from above. A partial differential equation is derived to characterize the price of a participating policy and solved with the finite difference method. Finally, we discuss the impacts of early default regulation and insurance company's investment strategies on the policyholder's surrender behavior as well as on the contract value, which are dependent on policyholder's rationality level.
Harry Zheng: “Turnpike Property for an Investment Model with General Utility Functions”
Abstract: In this talk we discuss a question faced by a long-term investor with a power-type utility at high levels of wealth: Does the turnpike property still hold for a general utility? We give a positive answer to the question. To achieve that we first show that there is a classical solution to the dynamic programming HJB equation and give a representation of the solution in terms of the dual function of the solution to the dual HJB equation. We demonstrate the usefulness of that representation with some nontrivial examples. We then give a simple direct proof with the partial differential equation method to the turnpike property and provide some sufficient conditions that guarantee the turnpike property in terms of both primal and dual utility functions.
Stephan Luck: “Banks, Shadow Banking, and Fragility" (joint work with Paul Schempp)
Abstract: This paper studies a dynamic banking model of maturity transformation in which regulatory arbitrage induces the coexistence of regulated commercial banks and shadow banking. We derive three main results: First, the relative size of the shadow banking sector determines the stability of the financial system. If the shadow banking sector is small relative to the capacity of secondary markets for shadow banks' assets, shadow banking is stable.
However, once the sector grows too large, a panic-based run on shadow banks constitutes an equilibrium. Second, if regulated commercial banks sponsor shadow banks, a larger the shadow banking sector is sustainable. However, once this sustainable level is exceeded, the threat of a crisis reappears and also affects the sector of commercial banking. Third, in the presence of regulatory arbitrage, a safety net for banks may not only not be able to prevent a banking crisis. In case of a crisis, the safety net may become costly for the regulator.
Thomas Mosk: “Bargaining with a Bank”
Abstract: This paper studies firm bargaining behavior in the credit market using a unique hand-collected data set on 18,591 credit negotiations between small firms and a large commercial bank. In a typical credit negotiation the firm and the bank firstly set the collateral requirements, then the non-interest credit terms of the credit lines and term loans and finally the interest rates and fees. The bank extracts rents in the first offer from relationships and opaque firms and these firms are less likely to negotiate interest rate concessions, which suggests that informational frictions in the credit market give banks bargaining power. Negotiating firms pay a 33 basis points lower interest rate than otherwise similar firms which accept the first offer.
Paul Schempp: “Outside Liquidity, Rollover Risk and Government Bonds” (joint work with Stephan Luck)
Abstract: This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside instead of inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is a prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.