The Fisher Hypothesis and Its Implications for Defined Benefits
-
Andrew P. Leung
Abstract
Asset liability management is often employed for managing the risks associated with defined benefits. Liability Driven Investment is a recent phenomenon in financial circles, promising a coherent framework for achieving this aim. It has been focused on managing interest rate risks by appropriate debt strategies. However the formulation of debt strategies needs to take explicit account of one characteristic that affects most liabilities, namely inflation. This factor generates as much risk as interest rates; moreover it is intimately related to them. We examine this issue in depth, and consider the economic relationships between interest rates and inflation. This is conducted in the light of the Fisher Hypothesis. We show that this analysis has significant implications for nominal debt strategies.
Appendix: estimation of error correcting model
Australia ECM
| j | ||
| 1 | –0.002 | –0.082 |
| 2 | –0.001 | 0.006 |
Australia ECM
| j | ||||
| 1 | 0.160 | –0.178 | –0.070 | 0.027 |
| 2 | –0.144 | 0.596 | –0.165 | 0.389 |
| 3 | 0.028 | 0.082 | –0.102 | –0.032 |
| 4 | 0.172 | 0.145 | 0.145 | –0.036 |
| 5 | 0.270 | –0.106 | 0.068 | –0.014 |
| 6 | 0.471 | –0.588 | 0.305 | –0.478 |
| 7 | 0.782 | –1.060 | 0.507 | –0.534 |
| 8 | 0.056 | –0.202 | 0.014 | –0.191 |
| 9 | 0.553 | –0.655 | 0.056 | 0.028 |
| 10 | 0.415 | –0.281 | 0.226 | –0.212 |
| 11 | 0.305 | 0.014 | 0.017 | 0.333 |
| 12 | –0.039 | –0.028 | –0.024 | 0.003 |
| 13 | –0.271 | 0.820 | –0.154 | 0.314 |
| 14 | 0.438 | –0.588 | 0.246 | –0.438 |
| 15 | 0.491 | –0.461 | 0.308 | –0.384 |
| 16 | 0.226 | –0.304 | 0.045 | –0.132 |
| 17 | 0.105 | –0.185 | –0.118 | 0.024 |
US ECM
| j | ||
| 1 | –0.000 | –0.624 |
| 2 | 0.000 | –0.545 |
US ECM
| j | ||||
| 0 | 1.000 | 0.000 | 0.000 | 1.000 |
| 1 | –0.245 | 0.121 | –0.329 | 0.090 |
| 2 | –0.048 | 0.391 | –0.302 | 0.141 |
| 3 | –0.782 | 0.239 | –0.515 | 0.216 |
| 4 | –0.234 | 0.691 | –0.349 | 0.677 |
| 5 | –0.440 | 0.529 | –0.179 | 0.614 |
| 6 | –0.005 | 0.600 | 0.097 | 0.141 |
| 7 | –0.233 | 0.389 | –0.200 | –0.187 |
| 8 | –0.120 | 0.352 | –0.751 | 0.426 |
| 9 | –0.512 | –0.182 | –0.706 | 0.734 |
| 10 | –0.428 | 1.055 | –0.337 | 0.695 |
| 11 | –0.189 | 0.076 | 0.007 | –0.106 |
| 12 | –0.086 | 0.404 | –0.314 | 0.398 |
| 13 | –0.422 | –0.012 | –0.592 | 0.314 |
| 14 | –0.734 | 0.884 | –0.387 | 0.571 |
| 15 | –0.512 | 0.505 | –0.132 | –0.045 |
| 16 | –0.215 | 0.351 | 0.260 | –0.039 |
| 17 | –0.298 | 0.349 | –0.267 | 0.365 |
| 18 | –0.201 | 0.320 | –0.317 | 0.052 |
| 19 | –0.244 | 0.359 | –0.428 | 0.283 |
| 20 | 0.088 | –0.129 | –0.135 | –0.057 |
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©2015 by De Gruyter
Articles in the same Issue
- Frontmatter
- Measuring Self-Service Technology Latent Difficulties: Insurance Decisions on Utilitarian and Hedonic Influences
- The Impact of Public Insurance on Private Insurance Demand
- Do the Over-the-Counter Sales at Banks Expand the Individual Annuity Market in Japan?
- Risk Analysis for Reverse Mortgages with Different Payout Designs
- The Fisher Hypothesis and Its Implications for Defined Benefits
- The Square-Root Rule for Reinsurance: Further Analysis and Consideration of China’s Market
Articles in the same Issue
- Frontmatter
- Measuring Self-Service Technology Latent Difficulties: Insurance Decisions on Utilitarian and Hedonic Influences
- The Impact of Public Insurance on Private Insurance Demand
- Do the Over-the-Counter Sales at Banks Expand the Individual Annuity Market in Japan?
- Risk Analysis for Reverse Mortgages with Different Payout Designs
- The Fisher Hypothesis and Its Implications for Defined Benefits
- The Square-Root Rule for Reinsurance: Further Analysis and Consideration of China’s Market
