In partnership with Association française de finance an academic and professional review n° 134 January-february 2015 ISSN 2101-9304 150 euros revue-banque.fr ARTICLES 6 Economic-financial Literacy and (Sustainable) Pension Reforms: Why the Former is a Key Ingredient for the Latter Elsa FORNERO, University of Turin and CeRP-Collegio Carlo Alberto 18 Cyclicality and Term Structure of Value-at-Risk within a Threshold Autoregression Setup Frédérique BEC, THEMA, Université de Cergy-Pontoise and CREST, and Christian GOLLIER, Toulouse School of Economics, LERNA and IDEI 34 Can Large Long-term Investors Capture Illiquidity Premiums? Frank DE JONG and Joost DRIESSEN, Tilburg University 62 Long-term Portfolio Allocation Based on Long-term Macro Forecasts Éric JONDEAU and Michael ROCKINGER, Swiss Finance Institute and HEC Lausanne 71 Projecting Pension Outcomes at Retirement – Towards an Industry Reporting Standard Kees DE VAAN, Syntrus Achmea Vermogensbeheer, Daniele FANO, Tor Vergata University, Herialt MENS, Aegon Asset Management, and Giovanna NICODANO, CeRP-Collegio Carlo Alberto, Netspar and University of Turin Special Issue Pension Guest editors : Marie BRIÈRE (Amundi, Paris Dauphine University and Université Libre de Bruxelles) and Patrice PONCET (ESSEC Business School)
Transcript
In partnership with Association française de finance
6 Economic-financial Literacy and (Sustainable) Pension Reforms: Why the Former is a Key Ingredient for the Latter
Elsa FORNERO, University of Turin and CeRP-Collegio Carlo Alberto
18 Cyclicality and Term Structure of Value-at-Risk within a Threshold Autoregression Setup
Frédérique BEC, THEMA, Université de Cergy-Pontoise and CREST, and Christian GOLLIER, Toulouse School of Economics, LERNA and IDEI
34 Can Large Long-term Investors Capture Illiquidity Premiums? Frank DE JONG and Joost DRIESSEN, Tilburg University
62 Long-term Portfolio Allocation Based on Long-term Macro Forecasts Éric JONDEAU and Michael ROCKINGER, Swiss Finance Institute and HEC Lausanne
71 Projecting Pension Outcomes at Retirement – Towards an Industry Reporting Standard Kees DE VAAN, Syntrus Achmea Vermogensbeheer, Daniele FANO, Tor Vergata University,
Herialt MENS, Aegon Asset Management, and Giovanna NICODANO, CeRP-Collegio Carlo Alberto, Netspar and University of Turin
Special Issue Pension Guest editors : Marie BRIÈRE (Amundi, Paris Dauphine University and Université Libre de Bruxelles)
and Patrice PONCET (ESSEC Business School)
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Bankers, Markets and Investors aims at publishing short and innovative research articles in the areas of banking, financial markets and investment with relevant practical application for investors.
The purpose of the journal is to create a bridge between academics and professionals, by pu-blishing articles that have direct relevance to those working in the investment field. We seek short articles, forward looking and rigorous, written in a style accessible to professional readership.
The themes of the journal include the following: portfolio choice, investment management, ins-titutional investors (pension funds, sovereign wealth funds, insurance, mutual funds…), individual investors and household finance, behavioral finance, alternative investments (hedge funds, private equity…), derivatives and structured finance, liquidity and transaction costs, socially responsible investment, funds and corporate governance, regulation and financial risk management.
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Managing Editor: Marie Brière, Amundi, Paris Dauphine University, Université Libre de Bruxelles
Founding editor: Jean-François Boulier, Aviva
Sanvi Avouyi-Dovi, Banque de France Philippe Bertrand, IAE Aix and Kedge Business SchoolBruno Biais, TSE Zvi Bodie, Boston UniversityAlain Chevalier, ESCP Europe Philippe Desbrières, IAE Dijon Nicole El Karoui, École PolytechniqueAntoine Frachot, GENES, ENSAE Edith Ginglinger, Paris Dauphine University Christian Gourieroux, CREST, Toronto UniversityUlrich Hege, HEC Georges Hübner, HEC Management School, University of Liège Monique Jeanblanc, Evry University Lionel Martellini, Edhec Kim Oosterlinck, ULB Patrice Poncet, Essec Sébastien Pouget, TSEFlavio Pressacco, Udine UniversityFrançois Quittard-Pinon, EM LyonMichael Rockinger, HEC LausanneLuc Renneboog, Tilburg UniversityRonnie Sadka, Boston College Stephen Schaefer, LBSAriane Szafarz, ULB Nizar Touzi, École Polytechnique Bas Werker, Tilburg University
Many countries are experiencing serious problems in sustaining their pen-sion systems. This is due to the impact of a structural increase in liabilities related to longer life expectancy, combined with the adverse effects of the recent financial crisis on asset performance. These difficulties, common to many pension systems worldwide, recently prompted a number of countries to implement various reforms. In Europe, the situation has become even more complex due to considerable uncertainty about future pension regulation. The European Commission is currently striving to unify the regulation of pension funds across Europe, as it has done for insurance companies.
These challenges raise important questions for pension management going forward. How to support and encourage sufficient savings and investment for future pensioners? How to regulate pension institutions so as to sustain their role in promoting intergenerational risk sharing? And for pension institutions themselves, how to build an appropriate investment portfolio, given cyclical financial market returns, extremely low interest rates, and considerable uncer-tainty about growth and employment. (Other crucial factors affecting the defi-nition of institutions’ asset allocations include the long-term nature of their liabilities, their short-term liquidity needs, and growing regulatory constraints.)
The six papers in this special issue examine various aspects of these crucial questions. Elsa Fornero (p. 6 to 16) analyzes the characteristics of pension reforms and the challenges of effective communication. Frédérique Bec and Christian Gollier (p. 18 to 32) assess empirically the role of cyclical effects in financial return dynamics and suggest that the rules on solvency capital requi-rements should adapt to the state of financial markets. Franck De Jong and Joost Driessen (p. 34 to 60) investigate the possibility for long-term investors to benefit from liquidity premiums in illiquid investments and provide an extensive overview of the recent academic literature on this issue. Éric Jondeau and Michael Rockinger (p. 62 to 69) propose a framework for long-term asset allocation that can take account of macroeconomic forecasts. Finally, Kees de Vaan, Daniele Fano, Herialt Mens and Giovanna Nicodano (p. 71 to 86) pro-pose a method for projecting and benchmarking defined-contribution benefits on retirement; their method can serve as a reporting standard for individual retirement savings accounts or DC pension funds.
■■ Economic-financial Literacy and (Sustainable) Pension Reforms: Why the Former is a Key Ingredient for the Latter 6Elsa Fornero, University of Turin and CeRP-Collegio Carlo Alberto.
Financial literacy has important implications for economic reforms. Reforms are meant to change people’s behavior and their effectiveness crucially depends on the ability of citizens to recognize and generally approve their necessity, their general design, and their “sense of direc-tion.” Without basic understanding by citizens, reforms risk having little or no effect or even being reversed. Informed judgment about economic reforms requires information and numeracy as well as literacy. This is particularly true of pension reforms because of their profound impact on people’s life plans. The 2011 Italian pension reform is a case in point.
■■ Cyclicality and Term Structure of Value-at-Risk within a Threshold Autoregression Setup 18Frédérique Bec, THEMA, Université de Cergy-Pontoise, and CREST, Malakoff, France, and Christian Gollier, Toulouse School of Economics (LERNA and IDEI), France.
This paper explores empirically the link between stocks returns Value-at-Risk (VaR) and the state of financial markets across various holding horizons. The econometric analysis is based on a self-exciting threshold autoregression setup. Using quarterly French and US data from 1970Q4 to 2012Q4, it turns out that the k-year VaR of equities is actually dependent on the state of the market: the expected losses as measured by the VaR are smaller in bear market than in normal or bull market, whatever the horizon. It also turns out that the longer the holding horizon, the smal-ler the expected losses as measured by the VaR, whatever the state of the market. These results suggest that the rules regarding the solvency capital requirements should adapt to the state of the financial market as well as to the investors holding period.
JEL Codes: G11. Keywords: Expected Equities Returns; Value at Risk; Financial Cycle; Holding Horizon; Threshold Autoregression.
■■ Can Large Long-term Investors Capture Illiquidity Premiums? 34Frank de Jong and Joost Driessen, Tilburg University.
In this paper we perform a literature study to assess whether large long-term investors can benefit from liquidity premiums in different asset classes. We both describe the theoretical predictions on liquidity pre-miums and portfolio choice with illiquidity, as well as empirical evidence
on liquidity premiums. We document that expected liquidity premiums in stocks have diminished in recent years and are hard to capture for large investors. In corporate and government bond markets there are more opportunities to exploit liquidity premiums. The evidence on liquidity premiums in alternative investment classes is scarce.
■■ Long-term Portfolio Allocation Based on Long-term Macro Forecasts 62Eric Jondeau and Michael Rockinger, Swiss Finance Institute, University of Lausanne
We first discuss arguments that rebut quantitative portfolio allocation for the long term based on non predictability of asset markets. Next, we find that over long time horizon such as 10 years, macro-economic forecasts of various economic variables outperform in terms of mean-squared errors those obtained with purely statistical techniques. We dis-cuss the components needed to model liability returns and empirically demonstrate that a) portfolio allocations taking into account pension fund hedging demand substantially differ from traditional asset allo-cations that b) in terms of certainty equivalent, there is a large cost if one neglects liabilities. The utility cost of using suboptimal strategies amounts to several percent returns essentially due to deterioration of volatility. The cost of imposing positive weights on asset-liability mana-gement allocations is also economically significant.
■■ Projecting Pension Outcomes at Retirement – Towards an Industry Reporting Standard 71Kees De Vaan, Syntrus Achmea Vermogensbeheer, Daniele Fano, Tor Vergata University, Herialt Mens, Aegon Asset Management, and Giovanna Nicodano, CeRP-Collegio Carlo Alberto, University of Turin
We propose a method for projecting pension benefits, deriving from DC pension plans and other funded products, at retirement. Projec-tions highlight how the current choice of asset allocation impacts on future potential retirement outcomes. The latter are compared with a money-back benchmark so as to clarify the trade-off between risk and return. After the initial projections, the pension plan revises its forecasts of retirement benefits on a yearly basis as a function of its own realized returns. Previous shorter-term projections are also compared to shor-ter-term ex-post performance. This simple method is a step towards an industry-reporting standard that responds to regulators’ quest for helping investors monitoring the risk of their future pension.
Economic-financial Literacy and (Sustainable) Pension Reforms: Why the Former is a Key Ingredient for the Latter
■ I. The role of reforms in today’s market-oriented societies
The overall worsening of government finances in advanced countries during the last two-three decades, and emergency situations stemming from the financial/economic crisis that started in 2008 have prompted inter-national institutions such as the OECD, the IMF, and the World Bank to insistently pressure developed countries to undertake wide-ranging reforms of their welfare systems, labor markets, and public sector. In spite of urgency, in a democracy, reforms must comply with the fundamental principle that governments are ultimately accountable to their citizens. While citizens may not be called upon to approve reforms directly through referendums, they are nonetheless the indirect drivers of the political process, since politicians are aware that their electoral prospects depend on voters’ evaluations of their track record and proposed agenda. This evaluation looms large in economic policy in general and in economic reforms in particular.
In a market economy, policy makers set the “rules of the game” that establish the framework within which mar-ket forces operate. Economic reforms modify outdated, ineffective, and misapplied rules. They do so mainly by altering individuals’ incentives and ultimately their atti-
tudes, decisions, and actions. Such reforms have thus a great impact on people’s lives and, as an investment, entail immediate and easily computable costs against uncertain future benefits.
It is the duty of political parties —especially those that receive majority support, express the government’s view, or see themselves as a viable alternative to the government of the day— to explain to citizens why old rules must be modified and along what lines; to illustrate the mechanics of possible reforms; to receive feedback; and to adjust and modify the original project taking this feedback into account. Political parties, however, tend to look at social problems through ideological lenses and to underesti-mate their more “technical” aspects and constraints. It is thus the task of experts to help politicians design reforms by offering qualified/scientific advice, while leaving to them the framing of those reforms into a set of values (or “ideology”) that the electorate can recognize, give credit to, and possibly help to correct in order to take account of the complications of everyday life. An economic reform, therefore, is usually a mix of political and technical ele-ments, the former in the forefront of communication and the latter mostly backstage.
Sometimes, however, this scheme weakens or simply breaks up. This is more frequent when exceptionally severe reforms are necessary in an emergency (as in the case of Greece in the financial crisis that started in 2008 and in Italy in November 2011), but political parties lack the stamina to introduce them for fear of losing the elec-torate’s favor. It is no wonder that, in times of financial crisis, reforms are wildly unpopular since they imply belt tightening and sorely resented changes in most people’s way of life.
In these situations, experts tend to play a major role. This role can be indirect (as, e.g., when countries receive international support for recovery programs, on condition that they introduce very stringent austerity measures1) or direct, when experts are asked to take up key government positions or even to form a “technocratic” government. There is hardly any other justification for a technocratic government in a democracy than as an antidote to the weakness and electoral fear of the most representative
Elsa FornEroUniversity of Turin and CeRP-CollegioCarlo Alberto
* Department of Economics, University of Turin, Corso Unione Sovietica 218 bis, 10134 Torino, ItalyTel: +390116706076Email: [email protected] webpage: http://www.personalweb.unito.it/elsa.fornero/home.html
I would like to thank Anna Maria Lusardi for having passed on to me her passion for financial literacy and for her warm hospi-tality at the GFLEC (Global Financial Literacy Excellence Centre), George Washington University, Business School, Washington DC, in February 2014, a very constructive and stimulating experience. I also thank two anonymous referees for useful comments and suggestions.
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ABONNEMENTS 2015
In partnership with Association française de finance
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11 Evaluating UCITS Compliant Hedge Fund Performance Serge DAROLLES, Université Paris Dauphine
24 Do Cooperative Banks Have Greater Market Power? Damien EGARIUS and Laurent WEILL, LaRGE Research Center, EM Strasbourg Business School, University of Strasbourg
34 In which Media are Analysts’ Recommendations most Followed? Nadine GALY, University of Toulouse-Toulouse Business School Laurent GERMAIN, University of Toulouse, Toulouse Business School and ISAE Denis HILTON, University of Toulouse II Rainer MATHES, Prime Research, Mainz, Germany
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