Theo Nijman

Tilburg University | UVT

We propose an easy to implement yield curve extrapolation method to determine long-term interest rates suitable for regulatory valuation. We empirically evaluate this approach for the German nominal bond market, by estimating the model on bonds with maturities up to 20 years and assessing the out-of-sample performance for bonds with maturities beyo...

In conceptteksten voor de Wet Toekomst Pensioenen wordt koopkrachtbehoud vaak aangehaald, maar wordt slechts beperkt aandacht besteed aan het beheersen van inflatierisico. Dit mag eigenlijk geen verbazing wekken, want sinds het einde van de jaren ‘90 is de inflatie op een zeer bescheiden niveau gebleven, zonder grote, langdurige schommelingen. Het...

This paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from t...

To improve the design of the pay-out phase of DC plans, this paper proposes a new approach to structure pension products: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific f...

We examine incomplete annuity menus, background risk, bequest motives, and default risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annu...

We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differ...

Private pension provision faces the challenging task of providing stable income streams during retirement. The challenge has increased markedly in the last decades due to volatile financial markets, falling interest rates and the withdrawal of employers and external insurers as risk bearers of systematic financial and longevity risks. Partly becaus...

We explore Dutch proposals for defined ambition plans in an occupational pension context. Firms no longer act as external risk sponsors but continue to provide a distributional platform for pensions, thereby addressing behavioral and agency issues as well as imperfections of insurance and financial markets. Pension entitlements are defined in terms...

We show that in both index-linked bond markets and inflation swap markets liquidity is an important determinant of prices. We do so by means of an asset pricing model with a liquidity risk factor and asset-specific liquidity characteristics. This liquidity risk factor is based on the measures of Amihud (2002) and Roll (1984). The level of liquidity...

This paper explicitly derives the optimal dynamic consumption and portfolio choice of a loss averse agent who endogenously updates his reference level. His optimal choice seeks protection against consumption losses due to downside financial shocks. This induces a (soft) guarantee on consumption and is due to loss aversion. Furthermore, his optimal...

We identify two types of risk premia in commodity futures returns: spot premia related to the risk in the underlying commodity, and term premia related to changes in the basis. Sorting on forecasting variables such as the futures basis, return momentum, volatility, inflation, hedging pressure, and liquidity, results in sizable spot premia in the hi...

Dutch employers and labor unions agreed in 2010 to support a major pension reform. The newly proposed contract replaces suggested nominal guarantees by " soft real rights ". The soft real rights are adjusted annually to unexpected real investment returns. In this paper we provide a formalization of this new Dutch pension contract with special empha...

The global financial crisis triggered a major redesign of the collective pension system in the Netherlands. The current Dutch system can be characterized as a defined benefit system with nominal guarantees, which are increased in line with inflation if investment returns are satisfactory. The crisis has shown that cuts in nominal benefits cannot be...

In this paper we present a simple multifactor model in which futures risk premia are determined by the covariance of the futures returns with the market return, as well as by hedging pressure variables. The model does not only identify the futures own hedging pressure as a determinant of the futures risk premium, but also hedging pressures from oth...

In this paper we analyze the performance of internationally investing U.S.based mutual funds, correcting for market frictions such as short sell constraints and transaction costs using a variety of performance measures. We …rst of all show that for a number of funds Jensen’s®is signi…cantly positive if market frictions are ignored. Subsequently we...

This paper studies the life-cycle consumption and portfolio choice problem taking account of annuity risk at retirement. The study allows for government-provided annuity income. Optimally, households allocate retirement wealth to nominal, inflation-linked and variable annuities, and condition this choice on the state of the economy. The case in whi...

The beneficiaries of a corporate defined benefit pension plan in financial distress care about the security of their promised pensions. We propose to value the pension obligations of a corporate defined benefit plan using a discount rate which reflects the funding ability of the pension plan and its sponsoring company, and therefore depends, in par...

This paper examines policies for the decumulation of pension wealth in the Netherlands. It suggests a design framework based on economic theory and international evidence. The central message is that a well-designed pension system has an important – although certainly not exclusive – role for annuities in the decumulation phase. Relative to the cur...

We examine incomplete annuity menus and background risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever li...

We study the importance of time-varying bond risk premia in a consumption and portfolio-choice problem for a life-cycle investor facing short-sales and borrowing constraints. Tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life-cycle patterns. We find that the investor is willing to pay an annual...

We analyze the effect of health cost risk on optimal annuity demand and consumption/savings decisions. Many retirees are exposed to sizeable out-of-pocket medical expenses, while annuities potentially impair the ability to get liquidity to cover these costs and smooth consumption. We find that if out-of-pocket medical expenses can already be sizeab...

The institutional settings related to pension provision differ widely within Europe. In some countries, income transfers within families are still very important. In other countries, major parts of pension provision are delegated to large financial conglomerates. Some countries rely almost exclusively on public pay-as-you-go (PAYG) systems. In othe...

We analyze the effect of health cost risk on optimal annuity demand and consumption/savings decisions. Many retirees are exposed to sizeable out-of-pocket medical expenses, while annuities potentially impair the ability to get liquidity to cover these costs and smooth consumption. We find that if out-of-pocket medical expenses can already be sizeab...

We examine incomplete annuity menus and background risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever li...

It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by int...

We study the optimal consumption and portfolio choice problem over an individual's life-cycle taking into account annuity risk at retirement. Optimally, the investor allocates wealth at retirement to nominal, inflation-linked, and variable annuities and conditions this choice on the state of the economy. We also consider the case in which there are...

Corporate defined-benefit plans suffer from a number of serious weaknesses, including credit risk of the sponsor, ambiguous ownership of the surplus and back-loading of benefits. Also defined-contribution plans feature drawbacks. Individuals are not well equipped to make the complex financial decisions involved, transaction costs are substantial an...

We analyze annuity demand in a realistic life-cycle model in which we optimize over consumption and asset allocation. We incorporate background risk and incomplete annuity menus as possible drivers of devia-tions from full annuitization. Retirees face longevity risk, capital market risk, inflation risk, and background risk. We model annuitization a...

Longevity Four: The Fourth International Longevity Risk and Capital Markets Solutions Conference was held in Amsterdam on 25-26 September 2008. It was hosted by Netspar and the Pensions Institute (at Cass Business School), organised by PensionSummit and sponsored by Cardano, EIM, Nationale Nederlanden, and Robeco; IPE and Pensions & Investments wer...

This paper studies the dissemination of performance information in the mutual fund industry. We document a hump-shaped lag pattern for the reaction of mutual fund flows to past performance, i.e., we find that very recent performance is less important than performance several months ago. We attribute this pattern to the presence of less sophisticate...

We analyze the importance of longevity risk for the solvency of portfolios of pension annuities. We distinguish two types of mortality risk. Micro-longevity risk quantifies the risk related to uncertainty in the time of death if survival probabilities are known with certainty, while macro-longevity risk is due to uncertain future survival probabili...

In modeling and forecasting mortality the Lee-Carter approach is the benchmark methodology. In many empirical applications the Lee-Carter approach results in a model that describes the log central death rates by means of linear trends. However, due to the volatility in (past) mortality data, the estimation of these trends, and, thus, the forecasts...

I develop a new approach to estimate managerial ability and risk preferences in dynamic models of delegated portfolio management in complete markets. The main complication is that the dynamics of assets under management can often not be discretized exactly. In addition, the investment strategy is not known analytically so that standard discretizati...

This paper surveys the academic literature on optimal saving and investment over an individual’s life cycle. We start out with a simple benchmark model with separable and smooth preferences, one aggregate risk factor and riskless wage income. Within this simple setting, optimal saving and investment behavior are explored from the perspective of ind...

We rigorously explain the numerical approach used in the above-mentioned paper. The methodology is based on Brandt, Goyal, Santa-Clara, and Stroud (2005) (Review of Financial Studies) and Carroll (2006) (Economics Letters). In addition to combining these numerical techniques, we suggest two extensions. First, the approach of Brandt, Goyal, Santa-Cl...

Pension solidarity can no longer be taken for granted. Due to demographic changes - and hence a growing retiree/employee ratio - additional contributions offer steadily fewer opportunities for clearing pension shortfalls. Together with the growing costs of contribution volatility and the trend towards short-termism, this means that the added value...

We study a dynamic asset allocation problem over the investor's life-cycle taking into account annuity risk at the moment of retirement. Optimally, the investor allocates wealth at retirement to nominal, inflation-linked, and variable annuities and conditions the annuity choice on the state of the economy. We also consider the case in which there a...

We study the optimal consumption and portfolio choice problem over an individual's life-cycle taking into account annuity risk at retirement. Optimally, the investor allocates wealth at retirement to nominal, inflation-linked, and variable annuities and conditions this choice on the state of the economy. We also consider the case in which there are...

The riskless nature in real terms of inflation-linked bonds has led to the conclusion that inflation-linked bonds should constitute a substantial part of the optimal investment portfolio of long-term investors. This conclusion is reached in models where investors do not receive labor income during the investment period. Since such an income stream...

Taylor's [Taylor, J. (2003). Risk-taking behavior in mutual fund tournaments, Journal of Economic Behavior and Organisation 50, 373-383] extension of the tournament model of Brown et al. [Brown, K. C., Harlow, W. V., Starks, L. T. (1996). Of tournaments and temptations: An analysis of managerial incentives in the mutual fund industry, Journal of Fi...

This paper investigates the question whether individual stock momentum in Europe is subsumed by country or industry momentum. We introduce a portfolio-based regression approach, which directly allows to test hypotheses about the existence and relative importance of multiple effects (e.g., momentum, value, and size), even when only a moderate number...

This paper analyzes trading strategies which capture the various risk premiums that have been distinguished in futures markets. On the basis of a simple decomposition of futures returns, we show that the return on a short-term futures contract measures the spot-futures premium, while spreading strategies isolate the term premiums. Using a broad cro...

In this paper we analyze the use and implications of (return-based) style analysis. First, style analysis may be used to estimate the relevant factor exposures of a fund. We use a simple simulation experiment to show that imposing portfolio and positivity constraints in style analysis leads to significant efficiency gains if the factor loadings are...

In this paper we investigate the relation between price impact and trading volume for a sample of stocks listed on the New York Stock Exchange. The parametric VAR-models that have been used in the literature starting with Hasbrouck (1991a, 1991b) impose strong proportionality and symmetry restrictions on the price impact of trades, although market...

Strategic Asset AllocationStatistical Significance of the Portfolio ImprovementTactical Asset AllocationConclusion Appendix A: The Optimal Mean-Variance Portfolio with Pension LiabilitiesAppendix B: Robustness Analysis: Different Expected Returns

The driving force behind the well-documented medium term momentum effect in stock returns is subject of much debate. Empirical papers that aim to find the determinants of this return continuation, seem to be almost exclusively restricted to US stock markets. Consequently, regional effects have received little attention in these analyses. This paper...

Performance persistence studies typically suffer from selection biases. As recently shown by Carhart [1997b] and Carpenter and Lynch [1998], standard methods of analysis on a survivorship free dataset still suffer from look-ahead bias. In this paper we show how one can easily correct for look-ahead bias using weights based on probit regx'essions.

Een kwantitatieve risico-indicator beoogt beleggingsrisico’s inzichtelijk te maken met behulp van kansuitspraken over de toekomstige waardeontwikkeling van financiële producten. In dit artikel wordt ingegaan op de voordelen van een dergelijke indicator ten opzichte van de informatie in de binnenkort in te voeren Financiële Bijsluiter. Tevens wordt...

While the majority of market microstructure studies deals with the behavior of frequently traded stocks, the focus of this paper is on illiquid securities listed on the NYSE. Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and the relation to the trading intensity. We e...

This study reconsiders the determinants of flows into US growth funds, focusing in particular on the dynamics of the impact of past performance on flows. We model the flow-performance relationship at the monthly frequency, allowing for dependence of the sensitivity of flows to past performance on size and age of the fund. The dynamics of the impact...

Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and its relation to the trading intensity. While the price impact curve for frequently traded stocks monotonically increases towards the full information price, we find impulse response functions that first 'over-shoot' an...

We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the...

Salmon prices exhibit substantial volatility. An understanding of the structure of volatility is of great interest since this is a major contributor to economic risk in the salmon industry. The volatility process in salmon prices was analysed based on weekly price data from 1995 to 2007. The Generalized Autoregressive Conditional Heteroskedasticity...

In this paper, we present a survey on the various approaches that can be used to test whether the mean-variance frontier of a set of assets spans or intersects the frontier of a larger set of assets. We analyze the restrictions on the return distribution that are needed to have mean-variance spanning or intersection. The paper explores the duality...

Performance persistence studies typically suffer from ex-post conditioning biases. As stressed by Carhart [Carhart, M.M., 1997. Mutual Fund Survivorship, Working Paper, Marshall School of Business, U.S.C.] and Carpenter and Lynch [J. Financ. Econ. 54 (1999) 337.], standard methods of analysis on a survivorship free sample are subject to look-ahead...

Taylor's [Taylor, J. (2003). Risk-taking behavior in mutual fund tournaments, Journal of Economic Behavior and Organisation 50, 373-383] extension of the tournament model of Brown et al. [Brown, K. C., Harlow, W. V., Starks, L. T. (1996). Of tournaments and temptations: An analysis of managerial incentives in the mutual fund industry, Journal of Fi...

In this paper we evaluate applications of (return based) style analysis. The portfolio and positivity constraints imposed by style analysis are useful in constructing mimicking portfolios without short positions. Such mimicking portfolios can be used e.g. to construct efficient portfolios of mutual funds with desired factor loadings if the factor l...

This paper tests whether hedging currency risk improves the performance of international stock portfolios. We use a generalized performance measure which allows for investor-dependencies such as different utility functions and the presence of nontraded risks. In addition we show that an auxiliary regression, similar to the Jensen regression, provid...

This paper develops a new model of market abuse detection in real time. Market abuse is detected, as Minenna (2003) proposed, on the basis of prediction intervals. The model structure is based on the discrete-time, extended market model introduced by Monteiro, Zaman, Leitterstorf (2007) to analyze the market cleanliness. Parameters of the expected...

In this paper, we estimate and interpret the factors that jointly determine bond returns of different maturities in the US, Germany and Japan. We analyze both currency-hedged and unhedged bond returns. For currency-hedged bond returns, we find that a linear factor model with five factors explains 96.5% of the variation of bond returns. Using regres...

Deze studie onderzoekt het derivatengebruik en de risicomanagementpraktijken van Nederlandse bedrijven.Tevens wordt het derivatengebruik van Nederlandse bedrijven met dat van Amerikaanse bedrijven vergeleken.Aan alle Nederlandse beursgenoteerde niet-financiele bedrijven is een enquete gestuurd.In totaal heeft 51% van de bedrijven de enquete geretou...

We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions and calculate the specification error bound of Hansen and Jagannathan to measure model misspecification. Using both short-maturity and long-maturity bond return data we find, under the assumpti...

In this paper we empirically analyze the impact of transaction costs on the performance of affine interest rate models. We test the implied (no arbitrage) Euler restrictions and we calculate the specification error bound of Hansen and Jagannathan, to measure the extent to which a model is misspecified. Using data on T-bill and bond returns we find,...

De povere prestaties van beleggingsfondsen De prestaties van beleggingsfondsen kunnen niet simpel worden afgelezen aan hun rendementen. Er moet rekening gehouden worden met de bewuste keuze van een beleggingsstijl. Als dit gebeurt, blijken de rendementen van tien grote fondsen zoals ABN Amro Aandelen, ING Dutch en Robeco de particuliere belegger ge...

Over the last half century UK defined benefit pension schemes have followed the cult of the equity by investing a large proportion of their assets in equities. However, since the turn of the millennium this cult has faced two serious challenges the halving of equity prices, and the complete rejection of equity investment by the Boots pension scheme...

In this article we develop a test for the hypothesis that a series (observed in discrete time) is generated by a diffusion process. This test is based on an overidentifying relation between variance and kurtosis parameters that holds for generalized autoregressive conditional heteroscedastic diffusions. The proposed test is not specific to a partic...

In this paper, the authors develop a test for the hypothesis that a series (observed in discrete time) is generated by a diffusion process. This test is based on an overidentifying relation between variance and kurtosis parameters that holds for GARCH diffusions. The proposed test is not specific to a particular data frequency and clearly indicates...

In this paper we show how style analysis of mutual funds can be used to circumvent the problem of self-reported investment styles, and to improve relative performance evaluation. Subsequently, we relate style analysis to performance evaluation and present results on the performance of Dutch mutual funds. Most strinkingly, Dutch mutual funds that ma...

Poor performing mutual funds are less likely to be observed in the data sets that are typically available. This so-called survivor problem can induce a substantial bias in measures of the performance of the funds and the persistence of this performance. Many studies have recently argued that survivorship bias can be avoided by analyzing a sample th...