3 Presentations

• 
  02:00 PM - 02:30 PM

  Risk Analysis of the Smith Manoeuvre for Re-advanceable Canadian Mortgages

  • Almas Naseem, presenter, University of Western Ontario
  • Mark Reesor, University of Western Ontario

  Our American counter-parts have been able to use their home mortgage interest costs as an income tax deductible expense.
  This is not the case for Canadians having a traditional mortgage. One way of transforming from non-tax deductible to tax
  deductible interest expenses is to borrow against home equity to make investments. The interest paid on this borrowing is tax
  deductible according to Canadian tax law. This can be achieved through a re-advanceable mortgage and has been promoted
  by personal financial planners as a way of significantly decreasing the time required to pay off a mortgage and the associated
  total interest cost. The promotional materials for this strategy typically make assumptions about the interest rate paid on the
  borrowings and the rate of return earned by the investment. What is missing from this promotional material, however, is the
  notion of risk associated with the investments holdings (typically a stock or mutual fund). Here we study the risk associated
  with this strategy to provide a better description of the mortgagor’s position.

  Using simulation we assess the risk to the homeowner associated with the re-advanceable mortgage. We find that on average, the mortgage payoff time is less than mortgage term. However, there is considerable variation in the payoff times with a significant probability of a payoff time exceeding mortgage term. Furthermore, the higher the marginal tax rate, the more the average payoff time is reduced implying that this strategy is more beneficial to high-wage earners. Using a simple stochastic model for job status we also investigate the effect of job loss on the payoff time distribution. In the event of job loss, the investment portfolio protects the homeowner from default as part of the investment portfolio can be sold to fund mortgage payments, another benefit that is not typically advertised.

  Variable rate mortgages are also considered in our study. The mortgage rate models we consider are the mean reverting rate model without a diffusion term and CIR process. There is not a big difference in the average payoff time for the mean reverting rate model with no diffusion. However, once the diffusion term is included, the average payoff time and the volatility of payoff time increase according to the volatility of CIR process. We also incorporate housing price and investigate that it can decrease the average payoff time of the mortgage however this comes at the cost of increased standard deviation.

• 
  02:30 PM - 03:00 PM

  Measuring the Globalization Influence on the Stock Market Using Network Approach

  • Valery Kalyagin, National Research University Higher School of Economics
  • Arsenii Vizgunov, presenter, National Research University Higher School of Economics
  • Panos Pardalos, University of Florida

  Globalization has a powerful influence on the world economy but it is hard to measure and evaluate its affects. We observed that the cliques' sizes are increasing over time which suggests the movement of the stock prices changes in the same direction. We use the network representation of the stock market: each vertex represents a stock, and the vertices are adjacent if the correlation coefficient between their returns over a certain period of time is greater than specified threshold. The globalization degree can be evaluated as the number and size of the dense components with the large influence on the market. The volume of a stock is used to measure the influence of the stock on the market. Dense sets of the vertices are found using maximum clique patterns and cliques partitioning. We apply our approach to the US, Russian, Brazilian, Indian stock markets over period from 2007 to 2011 and analyze obtained results.

• 
  03:00 PM - 03:30 PM

  Ageneral Framework to Price Segregated Funds Guarantees

  • Ali Boudhina, presenter, HEC Montréal
  • Michèle Breton, GERAD, HEC Montréal

  The evaluation of guarantees and options offered by segregated funds is a complex problem. In addition to market uncertainty, one has to account for the behavior of investors, which affect the value of the contract. We propose a general dynamic programming based framework for the valuation of such contracts, which can price maturity, death and minimal revenue guarantees, as well as reset and shout options, under the conservative assumption of optimal exercise. Asset price dynamics are modeled using a regime‐switching log‐normal process. Numerical experiments show the efficiency of the approach.