The Journal of Finance

The Cross‐Section of Managerial Ability, Incentives, and Risk Preferences

Published: 01/08/2014   |   DOI: 10.1111/jofi.12140

RALPH S.J. KOIJEN

I estimate a dynamic investment model for mutual managers to study the cross‐sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time‐varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay‐for‐performance sensitivities that relates to observable fund characteristics.

The Fragility of Market Risk Insurance

Published: 02/11/2022   |   DOI: 10.1111/jofi.13118

RALPH S.J. KOIJEN, MOTOHIRO YOGO

Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low‐interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID‐19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.

Predictive Regressions: A Present‐Value Approach

Published: 07/15/2010   |   DOI: 10.1111/j.1540-6261.2010.01575.x

JULES H. Van BINSBERGEN, RALPH S. J. KOIJEN

We propose a latent variables approach within a present‐value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price‐dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with R2 values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.

Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Published: 03/18/2015   |   DOI: 10.1111/jofi.12273

RALPH S.J. KOIJEN, STIJN NIEUWERBURGH, MOTOHIRO YOGO

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life‐cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long‐term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.

Optimal Decentralized Investment Management

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01376.x

JULES H. Van BINSBERGEN, MICHAEL W. BRANDT, RALPH S. J. KOIJEN

We study an institutional investment problem in which a centralized decision maker, the Chief Investment Officer (CIO), for example, employs multiple asset managers to implement investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two‐step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs for the CIO. We focus on (1) loss of diversification, (2) unobservable managerial appetite for risk, and (3) different investment horizons. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. We find that the CIO's uncertainty about the managers' risk appetites increases both the costs of decentralized investment management and the value of an optimally designed benchmark.