Essays on Asset Allocation Strategy under Taxing Billionaires and Housing Endowment Innovation

• Main Authors: Kuo-Shing Chen, 陳國興
• Other Authors: Lee, Chien-Chiang
• Format: Others
• Language: en_US
• Published: 2015
• Online Access: http://ndltd.ncl.edu.tw/handle/73519039129553051002

博士 === 國立中山大學 === 財務管理學系研究所 === 104 === This dissertation links the two leading social issues in the world today, i.e. wealth inequality and aging societies. The major aim of this study attempts to simultaneously solve these two problems. This dissertation contains two topics. First, in Chapter 2, I discuss the optimal asset allocation under a system that taxes the rich. A random wealth evolution process capturing wealth accumulation by a stochastic differential equation allows the billionaires to investment strategies (a) behavioral decision-making for risk aversion, such as tax evasion or avoidance, (b) exposing assets to stock market fluctuations, and (c) using asset allocation and diversification to hedge. The empirical results demonstrate that taxation on the rich will generate the tax evasion effect. Furthermore, the net worth of global billionaires is an insignificant influence on the government revenue. The model sheds light on the origin of the optimal asset allocation strategy described by base-case parameters under a taxing-the-rich system. Thus, I consider whether the current practice of taxing the rich is an appropriate procedure when trying to reduce wealth inequality and whether a suitable billionaire tax system could be adapted to reduce the taxation system’s distortion of the investor’s portfolio behavior. Second, in Chapter 3 and Chapter 4, I explore the Home Equity Release Products (hereafter ERPs) issue. The products have been promoted as a scheme of accessing equity locked up in a residence, particularly after the property owner has retired. However, ERPs constitute some risk factors: crossover risk, housing price depreciation risk and interest rate risk. In this article, I derive a new closed form approximation for European option prices and an actuarially fair price of mortgage insurance based on the Brownian motion process assumption and a reverse mortgage insurer’s risk with a reinsurance policy. The simulation method considers the stochastic processes of housing prices, and I analyze the insurer''s risk of government insured reverse mortgages after development of the insurance pricing model that applies the framework of European put options. The numerical results confirm that the reverse mortgages with proportional reinsurance contracts were highly sensitive to the housing price jump- diffusion process. To deal with longevity risk for the elderly, I evaluate the Black-Scholes model option to project future mortality to determine the values of expected losses. To my best knowledge, this paper is the first study to look at the risk diversification of ERPs via the reinsurance strategy.