Vol 10 2010

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The authors have estimated a model that fits the South African yield curve, using a Kalman filter. The model includes four latent factors and three observable macroeconomic variables (capacity utilisation, inflation and the repo rate). The goal is to capture the dynamic interactions between the macroeconomy and the yield curve in such a way that the resulting model can be used to generate interest-rate scenario trees that are suitable for fixed-income portfolio optimisation. An important input into the scenario generator is the investor’s view on the future evolution of the repo rate. In this paper, details of the model are provided and the results of the estimation and scenario generation are reported. Generating interest-rate scenarios 1mb A STOCHASTIC-PROGRAMMING APPROACH TO INTEGRATED ASSET AND LIABILITY MANAGEMENT OF INSURANCE PRODUCTS WITH GUARANTEES By H Raubenheimer and MF Kruger ABSTRACT In recent years insurance products have become more complex by providing investors with various guarantees and bonus options. This increase in complexity has provided an impetus for the investigation into integrated asset- and liability-management frameworks that could realistically address dynamic portfolio allocation in a risk-controlled way. In this paper the authors propose a multi-stage dynamic stochastic-programming model for the integrated asset and liability management of insurance products with guarantees that minimises the down-side risk of these products. They investigate with-profit guarantee funds by including regular bonus payments while keeping the optimisation problem linear. The uncertainty is represented in terms of arbitragefree scenario trees using a four-factor yield-curve model that includes macroeconomic factors (inflation, capacity utilisation and the repo rate). They construct scenario trees with path-dependent intermediate discrete yield-curve outcomes suitable for the pricing of fixed-income securities. The main focus of the paper is the formulation and implementation of a multi-stage stochastic-programming model. The model is back-tested on real market data over a period of five years. A stochastic-programming approach 771kb A MULTIPLE MARKOV SWITCHING MODEL FOR ACTUARIAL USE IN SOUTH AFRICA By AJ Maitland ABSTRACT This paper introduces a new class of Markov switching models where switches in variables are not perfectly correlated. Maximum-likelihood estimates of the parameters are derived and shown to require only the smoothed inferences obtained from a univariate analysis of the variables. The framework is used to estimate a multiple Markov switching (MMS) model of South African financial and economic variables, which can be used for various actuarial applications, especially those involving long-term projections. Users may wish to set certain parameters in relation to future expectations rather than simply using estimates based on past data, but that process is not covered in this paper. A multiple Markov switching model 1mb MODELLING THE MARKET IN A RISK-AVERSE WORLD: THE CASE OF SOUTH AFRICA By RJ Thomson ABSTRACT In this paper, descriptive models of real returns on the South African market portfolio are developed and analysed. The ‘market portfolio’ is taken to comprise listed equity and government bonds, aggregated in proportion to their market capitalisation from time to time. The models have the attributes that, conditionally on information at the start of a year: – the real return on the market portfolio during that year is normally distributed; and – the market price of risk during that year is reasonably greater than zero. For the purpose of predictive modelling, the best of the models considered was found to be a linear function of the risk-free rate. For that purpose it was decided to use ex-ante estimates of expected returns. This led to bias in the observed mean returns, which negates the rational expectations hypothesis. In the light of the literature on the subject, this is considered acceptable for these purposes. Modelling the market 588kb Guest Editorial SOME THOUGHTS ON RETIREMENT FUND REFORM McLeod (2005) warns: “Actuaries need to remind themselves of their professional responsibility to society at large and not only to the narrow world of private products in South Africa. The issue is also becoming more relevant for retirement-fund actuaries as they begin to deal with the Taylor Committee recommendations on mandatory social insurance for retirement.” Guest editorial 153kb ABSTRACTS OF RECENT POSTGRADUATE THESES AND DISSERTATIONS AT SOUTH AFRICAN UNIVERSITIES Abstracts of recent postgraduate theses 160kb ABSTRACTS OF ARTICLES IN OTHER SOUTH AFRICAN JOURNALS INVESTMENT ANALYSTS JOURNAL Viviers, S, Bosch, JK, Smit, EvdM & Buijs, A (2009). Responsible investing in South Africa. IAJ 69, 3–16 Given growing interest in the phenomenon of responsible investing (RI), both locally and internationally, the purpose of this paper is to provide an overview of the RI sector in South Africa. It focuses on the definition and characteristics of RI within the South African context; the size and nature of the local RI sector and the obstacles which impede on the growth of the local RI sector. Recommendations are made on overcoming these barriers. It is suggested that local institutional investors drive the rebranding of RI in South Africa and that more RI products be developed to cater for the diverse needs of RI investors, both locally and internationally. Articles in other journals 207kb BOOK REVIEW Hidden Markov Models for Time Series: An Introduction using R by Walter Zucchini and Iain L. MacDonald. Chapman & Hall (CRC Press), 2009 Hidden Markov models (HMMs) are statistical models in which the distribution that generates the observation depends on the state of an underlying but unobserved Markov process. They provide a general approach to modelling apparently non-stationary time series, where the non-stationarity originates from an underlying Markov process influencing the distribution of the observations. Book review 153kb CUMULATIVE INDEX Cumulative index 145kb
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