The fundamental approaches of financial economics to valuation are presented. Three methods are demonstrated by which financial economists account for risk. We illustrate how these methods relate to one another and how they can be applied in the valuation of risky corporate bonds, GICS with and without interest rate contingencies, and whole life insurance. Next, we discuss how these models treat orthogonal risks, such as the kind often covered by insurance contracts. Demand-side and supply-side diversification are treated. Liquidity risk is then considered. We conclude with a summary of the benefits of decomposition and transparency.
1. INTRODUCTION 基于CSP模型温州鞋革产业中小企业集群创新系统
There has been considerable discussion of a variety of issues related to fair value in the actuarial literature, in conferences, and among individuals interested in this topic. Unfortunately, we seem to be failing to communicate due, in part, to a lack of a consistent paradigm and objectives. In this discussion paper we present a few concepts that we hope will be of use in the broader 本文来自优.文~论^文·网原文请找腾讯32491.14 , there is an entire body of literature and practice in accounting, actuarial science, taxation, and regulation that will bear sway in the fair value debate. It is important, however, that the final form of fair value accounting does not deviate from well-established valuation principles that are tested by the entire world capital markets on a daily basis. Those valuation principles which emerge from the finance and economics literature and practice that do not hold up to empirical testing are rejected. That rejection often takes the form of market failure by those who implement unsound strategies.
The American Academy of Actuaries, the International Actuarial Association, the
* The authors are, respectively, Professor of Insurance and Finance, Wharton School, University of Pennsylvania; Proprietor of Jeremy Gold Pensions, New York, and Associate Professor of Finance, Marriott School of Management, Brigham Young University. They are indebted to many members of the American Academy of Actuaries’ valuation task force, especially Marsha Wallace, who helped them refine their ideas on this topic, and to three anonymous referees of this Journal, but take all responsibility for the views herein expressed, and any errors contained in this paper. Portions of this paper were published as “The Bullet GIC as an Example,” in Risk and Rewards, February 2001.
FASB, the IASB, the SEC and others have organized committees and task forces and sponsored symposia discussing issues relating to the valuation of insurance liabilities.
The goal of this paper is to review fundamental approaches to valuation from a financial economics perspective. Then we will discuss the treatment of default risk, the pricing of risks that are orthogonal to the market, and to the impact of illiquidity on insurance liability valuation2444