Keeping an eye on things
The fallacy is very clearly articulated here.
The author correctly states that “the historical evidence can soundly reject the hypothesis that the expected rate of house price inflation is equal to the risk free rate,” then incorrectly states that “the Black Scholes priced put option gives you that expected value if and only if the expected value of house price inflation equals the risk free rate”.
Kevin and I address the fallacy in a forthcoming paper, but I will briefly discuss it here.
We do our best to respond to anonymous emails (where appropriate) via the blog. However sometimes it is easier or better to respond directly, particularly when we need clarification in some point.
So if you really want to remain anonymous, it is easy to set up a gmail account for that purpose, to which we can respond. Or just use your own email address – we naturally respect all confidentiality where requested, or implied.
Thanks
Our friend Golden Retriever at golden.retriever@dogs.gov writes in about our last post on the profitability of equity release mortgage loans:
My first thought was that, surely with any investment, you know the profitability only once the asset has been redeemed, sold, or otherwise disposed of. At this point, you don’t need Black 76, or any other model, to work out profitability: you just look at actual cash inflows and outflows. Do I therefore take it that what you are looking at is actually expected profitability?
To quote Churchill:
The trouble with the ex post measure of profitability is precisely that you don’t know it until the loan has been repaid. We are interested in assessing expected profitability because we want to work out the valuations of the NNEG and ERM ex ante, so that firms have solid valuations at the time the loans are taken out. The only alternative ex ante I can think of is a crystal ball that works.
Of course, we recognise that NNEG valuation is a bit of a dog’s dinner.
Dean and I have just had a paper accepted by Economics Letters on the profitability of ERM loans to lenders. Economics Letters is a distinguished refereed economics journal.
Continue reading “Equity Release Sector Releasing Own Equity”
Tracy Blackwell’s (Pension Insurance Corp) reply to Jonathan Ford’s Sunday FT article.
The main event is today, and potentially for the following two days. You can watch by following the link here, cunningly disguised as A3-2019-2407 & A3-2019-2409. Starts at 10:00.
I have been leafing through Malleus Maleficarum, the 15th century guide to prosecuting witches, which contains a mass of detail about the correct legal process to be followed. Even if the judges in witchcraft cases knew about the scientific evidence we know today (i.e. witches don’t exist), they would have to ignore it, and follow the legal process set out, for example examining the body of the witch for “devil’s marks”.
Likewise, any scientific evidence that the illiquidity premium does not exist will be ignored in the current case. Whatever the Witchfinder General (you know who I mean) says about the existence of such things, must be considered to be the case. See e.g. here.
A fine piece from Ford of the FT today on pension buyouts.
Continue reading “Pension buyouts carry needless credit risks”
Sorry to have been quiet recently. The reason is a number of projects which are under confidentiality restraints. Much as we dislike the whole concept of ‘confidentiality’, i.e. secrecy, it is the price for being involved at all.
However this call for evidence from HMT is too good to ignore. As InsuranceERM reports:
Matching adjustment
The matching adjustment (MA) is a vital contributor to a strong Solvency II capital position among UK life insurers, adding close to £70bn of capital to solvency balance sheets.
It is, however, very restrictive in terms of the types of liabilities and assets that qualify – and the UK is looking at the possibility of loosening that. The MA also requires the regulator to operate a strict approval process, which the government is also seeking to ease.
The restrictive rules have produced unintended consequences, the UK says. For example, the PRA has allowed firms to restructure, via securitisation, assets such as equity-release mortgages that would not otherwise qualify for MA inclusion. However, the regulator dislikes the additional complexity this introduces, and the fact that it is costly and is a barrier to its use by smaller firms.
You couldn’t make it up.
The chart above is constructed using data from the new government downloadable database https://coronavirus.data.gov.uk , showing cases versus admissions versus deaths in England, all on a daily basis.
From the Penrose report following the Equitable Life disaster, 2004.