Topic
Embedded value
About: Embedded value is a research topic. Over the lifetime, 343 publications have been published within this topic receiving 8853 citations.
Papers published on a yearly basis
Papers
TL;DR: In this paper, the authors use a model to estimate what the market price for these claims would be if they were traded in financial markets, and find that the difference between market valuation and traditional actuarial valuation is large, especially when valuing the benefits of younger cohorts.
Abstract: One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach -- the approach currently used by the Social Security Administration in generating its most widely cited numbers -- ignores risk and instead simply discounts 'expected' future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is 'wage-indexed': future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and 'actuarial' valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.
34 citations
TL;DR: In this paper, the assumption-setting process is refocused on the key driver of a fair valuation of a life insurance company valuation, and the authors attempt to bridge the gap between option pricing and actuarial appraisal methodologies.
Abstract: Abstract With Statement of Financial Accounting Standards 115 (FASB 1993), insurers are now in the awkward situation that almost half of the balance sheet is marked to market. This has created a material inconsistency with the way liabilities are reported, thus diminishing the usefulness of financial reporting to shareholders and potential new investors. Discussion has emerged in the industry about the process of market valuing liabilities. The American Academy of Actuaries has formed a “Fair Valuation of Liabilities” task force to compare and review various alternative methodologies. During 1995 the Society of Actuaries and New York University jointly sponsored a conference on “Fair Value of Insurance Liabilities.” Motivated by the conference, this paper attempts to bridge the gap between option pricing and actuarial appraisal methodologies. The author suggests we refocus attention toward the assumption-setting process, which is the key driver of a fair valuation. In this regard, this paper attempts to advance practice and methodology with respect to life insurance company valuation.
34 citations
Patent•
16 Jun 2000
TL;DR: In this article, a method for engineering, manufacturing, procuring and managing a financial product which combines a finance agreement, a life insurance policy, and a securitization mechanism used to create fixed income securities is presented.
Abstract: Systems and methods are provided for engineering, manufacturing, procuring and managing a financial product which combines a finance agreement, a life insurance policy, and a securitization mechanism used to create fixed income securities. The present invention includes a computer readable medium having computer executable instructions for performing a method for engineering and managing a financial product. The method includes calculating a first death benefit value, wherein the first death benefit value includes a selected death benefit value for payment to a beneficiary of an insurance policy. A second death benefit value is calculated. The second death benefit component is calculated based on a loan value added to an interest formula value. The interest formula value includes an outstanding loan value multiplied by a selected interest rate percentage. According to the teachings of the present invention, the second death benefit value is added to the first death value component to produce the total death benefit value.
34 citations
Posted Content•
TL;DR: In this article, the authors derive a fully consistent counterpart for bilateral trade flows, also at the sectoral level, addressing the main shortcomings of previous works, and derive a precise measure of international trade generated within global production networks.
Abstract: Following the spread of global value chains new statistical tools, the Inter-Country Input-Output tables, and new analytical frameworks have been recently developed to provide an adequate representation of supply and demand linkages among the economies. Koopman, Wang and Wei propose an innovative accounting methodology to decompose a country's total gross exports by source and final destination of their embedded value added. However this decomposition presents some limitations and relevant inexactnesses in some of its components. We develop their approach further by deriving a fully consistent counterpart for bilateral trade flows, also at the sectoral level, addressing the main shortcomings of previous works. We also provide correct breakdown of the foreign content in total (world) trade flows and a brand new classification of these components that take the perspective of the exporting country. Finally, drawing on our methodology we derive for the first time a precise measure of international trade generated within global production networks. Two examples of empirical applications with relevant policy implications are also provided.
33 citations
TL;DR: In this article, the authors argue that value assessment and pricing capabilities provide the foundation for value creation and value appropriation in business-to-business markets, highlighting their implications for profiting from value created and delivered, and outlines important areas for future research.
Abstract: Value is a key concept for researchers and practitioners in the fields of strategy, marketing, and pricing. In the strategy literature, value is closely related to competitive advantage and profit, in the marketing literature value is the cornerstone of the marketing management process, in the pricing literature value represents the customer’s willingness to pay. The aim of this article is to bridge the gap between marketing, pricing and strategy research through a compilation of five short essays that focus on value assessment and pricing capabilities. This article argues that value assessment and pricing capabilities provide the foundation for value creation and value appropriation in business-to-business markets, highlights their implications for profiting from value created and delivered, and outlines important areas for future research.
32 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2021 | 3 |
| 2020 | 2 |
| 2019 | 2 |
| 2018 | 3 |
| 2017 | 14 |
| 2016 | 20 |