Onno W. Steenbeek

Doubling: Nick Leeson's trading strategy

This paper examines the trading strategy attributed to Mr. Nicholas Leeson, who was the chief derivatives trader of Barings bank in Singapore. His activities were the main cause of the eventual collapse of Barings bank. Daily information is available for the full period Leeson was active in Singapore, from January 1992 until 1995, for all relevant products. The information includes daily volume, open interest, opening, closing, highest and lowest price. The empirical evidence suggests that Leeson followed a doubling strategy: he continuously doubled his position as prices were falling.

Costs and Benefits of Collective Pension Systems

The concept of solidarity.- Solidarities in collective pension schemes.- Solidarity: who cares?.- Quantifying solidarity.- Operating costs of pension schemes.- Optimal risk-sharing in private and collective pension contracts.- Intergenerational value transfers within an industry-wide pension fund -a value-based ALM analysis.- Intergenerational solidarity in the uniform contribution and accrual system.- Everyone gains, but some more than others.- Mandatory participation.- Why mandatory retirement saving?.- Mandatory participation for companies.- Conclusion.- Macroeconomic aspects of intergenerational solidarity.- Summary and conclusions.

Intraday trading halts in the Nikkei futures market

The Osaka Securities Exchange (OSE) halts Nikkei 225 index-futures trading when the next transaction is to take place at a price more than ¥30 (prior to February 1994) or ¥60 (from February 1994) away from the previous trading price. This paper examines the efficacy of the intraday price limit rule in terms of price discovery, liquidity and volatility. We also include transaction data from the Singapore International Monetary Exchange (SIMEX) where Nikkei futures are traded simultaneously. The intraday price limit rule generally appears to be ineffective in reducing volatility and avoiding price jumps, at least partly because OSE traders have access to the alternative market at SIMEX.

Risk Models with Jumps and Time-Varying Second Moments

In this paper, we propose a new risk model to better address events like the recent credit crisis. First, the possible start of a crisis is modeled by including a low-probability jump process. Second, the risk characteristics of the crisis are captured by allowing for time-varying volatilities and correlations. Time variation in correlations is due to the changing importance of two sources: monetary shocks leading to a positive stock-bond correlation, and risk aversion (or “flight to safety”) shocks leading to a negative stock-bond correlation. The model stays within the essentially affine class, thereby allowing for closed-form solutions for arbitrage-free nominal and real bond prices of all maturities. Moreover, equity options and swaption prices are included in the estimation procedure to enhance the proper modeling of the volatility on the equity and interest rate markets. The model captures a large part of the time variation in financial risks for pension funds due to both changing volatilities and correlations.

Framing and the Annuitization Decision: Experimental Evidence from a Dutch Pension Fund

We report the effects of framing and default settings in annuity demand after conducting a survey-based experiment with over 3,000 members of a Dutch occupational pension plan. The participants were asked to allocate their real projected pension accrual between a life annuity and a partial lump sum. In particular, we investigated the joint effects of consumption and investment frames and gain and loss frames. We present strong evidence for framing and default setting effects in annuity demand. We also find robust evidence of individual characteristics of influence annuity demand, highlighting the importance of heterogeneity among participants. Framing and default effects remain significant when we control for individual characteristics. We conclude Dutch plan members generally welcome the partial lump sum option over full annuitization. Framing and default settings are generally capable of predictively steering annuity demand. The precise effect framing may have also depends on the institutional environment, which predefines the perspective through which individuals filter annuities.

Concave Payoff Patterns in Equity Fund Holdings and Transactions

Recent results from the hedge fund literature provide evidence that option-based risk factors may be a significant factor in managed fund returns. By examining a unique database of high-frequency holdings and transactions from a representative sample of forty Australian equity funds we find that exposure to these option-based risk factors may well arise from trading activity rather than from derivative positions that generate similar payouts. While the resulting concave payout patterns are associated with large and significant alphas in our sample, these alphas may be more a compensation for a modest increase in tail risk exposure than they are a reward for information-based trading.