Tag Archives: Valuation Models

A Case Study on Enterprise Risk Management: Allstate Inc.

In 2000, The Allstate Corporation started on an exciting and uncharted new course: to become an early insurance industry adopter of enterprise risk management (ERM). It has been a complex journey that has helped provide a deeper insight into the company’s underlying risk profile, enhanced the way Allstate manages risk in several significant ways and helped generate actions to better exploit risk opportunities.

The company’s initial effort began some years earlier at the direction of then-CFO, Tom Wilson, who established new capital allocation and valuation models for use in the finance function. Later, as Wilson moved into an operating role, John Carl joined Allstate as CFO and asked his staff what the company’s risk-adjusted returns were. A series of conversations resulted in a decision to explore developing a more quantitatively rigorous approach to measuring risk, similar to what was practiced in the oil and gas industry. Click here to read more…

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A Case Study on Elucidating Discount Function Properties from a Filtering Perspective

A Study about Elucidating Discount Function Properties from a Filtering Perspective

 

Abstract: This study identifies two properties of discount functions. First, discount functions can be conceived as nonlinear filters, where dynamic discount functions are low pass filters and static discount functions are high pass filters. Second, whether a discount function is static or dynamic depends on how interest rate paths are determined. Since the general principles of discounting and pricing apply to many financial products, the findings of this study are significant to financial theory and practice.

Introduction: Interest rate is a major determinant of theoretical prices of financial products. Some financial institutions have been developing new products by combining valuation models with innovative techniques where the specification of discount functions and interest rate dynamics provide the basis of model building. This study investigates the properties of discount functions using empirical data and provides fresh perspectives for reconsidering the robustness of economic and financial theories concerning financial products. Keep reading..

Case Study on Elucidating Discount Function Properties from a Filtering Perspective

Case Study about Elucidating Discount Function Properties from a Filtering Perspective

This study identifies two properties of discount functions. First, discount functions can be conceived as nonlinear filters, where dynamic discount functions are low pass filters and static discount functions are high pass filters. Second, whether a discount function is static or dynamic depends on how interest rate paths are determined. Since the general principles of discounting and pricing apply to many financial products, the findings of this study are significant to financial theory and practice.

Introduction: Interest rate is a major determinant of theoretical prices of financial products. Some financial institutions have been developing new products by combining valuation models with innovative techniques where the specification of discount functions and interest rate dynamics provide the basis of model building. This study investigates the properties of discount functions using empirical data and provides fresh perspectives for reconsidering the robustness of economic and financial theories concerning financial products. Because of data availability, this study takes the pricing model of an immediate certain annuity as an example to demonstrate how assumptions regarding interest rates significantly influence price dynamics. Keep reading…