This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

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Please do not quote without permission * Chidambaran is visiting at NYU, on leave from Tulane. Lee holds joint appointments at Tulane and HKUST. Trigueros is at Tulane. We are grateful for the comments from participants at seminars at Tulane

: 1 Introduction This paper grew out of various recent discussions with academics and practitioners around the theme of the interplay between insurance and finance. Some issues were: -- The increasing collaboration between insurance companies and banks. -- The emergence of finance related insurance products, as there are catastrophe futures and options, PCS options, index linked policies, . . . -- The deregulation of various (national) insurance markets. -- The discussions around risk management methodology for financial institu- tions (think of the various Basle Committee Reports). --- The evolution from a more liability modelling oriented industry (insurance) to a more global financial industry involving asset-liability and risk-capital based modelling. -- The emergence of financial engineering as a new profession, its interplay with actuarial training and research. Besides these more general issues, specific questions were recently discussed in papers like Gerber and Shiu (...

We propose a method of function approximation by radial basis function networks. We will demonstrate that this approximation method can be improved by a pre-treatment of data based on a linear model. This approximation method will be applied to option pricing. This choice justifies itself through the known nonlinear nature of the behavior of options price and through the effective contribution of the pre-treatment proposed for the implementation of radial basis function networks in this field.

We investigate numerical valuation of cross-currency interest rate-based derivatives under Babbs' extended Vasicek-style model bynumerical solution of the associated partial di#erential equation #PDE# --- in particular, we consider the terminable di#erential #di## swap. Firstly we precisely formulate, in terms of their cash #ows, various types of single and cross-currency swaps and swaptions. We describe Babbs' model for the domestic and foreign term structures and the exchange rate, its formulation in terms of three correlated driftless Gaussian processes and the associated three state variable parabolic PDE. We then formulate #nite di#erence approximations to the PDE, and discuss explicit and implicit methods. With this discrete approximation to the valuation problem in a period, we proceed to value the terminable di# swap and other deals numerically by backwards recursion through the payment dates, and investigate the solutions found graphically. We conclude that it is ...

. Positive and conditionally positive definite functions, especially radial basis functions and similar functions for spheres, tori, and even Riemannian manifolds, are of interest because of the their well-known ability to synthesize a good surface fit from scattered data. More recently, positive definite basis functions have been employed to analyze scattered data. The methods used to do this involve constructing multiresolution analyses or multilevel approximations. This paper will discuss recent developments in the synthesis and analysis problems, point out new directions in their investigation, and remark on applications. x1. Introduction Positive definite and conditionally positive definite functions and kernels are used in areas that require fitting a surface to data taken at scattered points in Euclidean space or on some surface, a sphere or torus, say. When the underlying space is Euclidean, radial basis functions (RBFs)--- e.g., Gaussians, multiquadrics, and thin-plate spline...

University Press Abstract: We examine why these regulatory differences exist and what they imply for differences in minimum capital requirements for position risk. We consider differences in the definition and measurement of regulatory capital and we quantify differences in the capital charges for position risk by reference to a model portfolio that contains a variety of financial instruments including equity, fixed income instruments, swaps, foreign exchange positions, and options – instruments that may appear in the portfolios of securities firms, banks or insurance companies. For most leading firms in the financial services industry, however, market forces, not minimum regulatory capital requirements, appear to play the dominant role in firms ’ capital decisions. Thus we conclude by considering measures to enhance market discipline.

Many of the newly issued corporate bonds are finding their way into insurance and pension fund asset portfolios. Modelling these bonds is tricky. Historic return distributions are well behaved and the observed credit spreads exceed all estimates of historic default probabilities. As a result, corporate bonds may appear anomalously attractive. We show that some of the more widely used models of corporate bonds have some major weaknesses from a theoretical perspective and in particular fail to explain this apparent anomaly convincingly. However, our analysis of the economics of corporate debt early in the paper suggests that credit spreads are option premiums and thus have option-like characteristics. This leads to the Merton Model as a means of capturing these characteristics. The model reveals that the apparent anomaly in credit spreads is another facet of well known apparent anomalies in option prices under the standard Black Scholes Model (such as the existence of skews and smiles in implied volatility). The latter anomalies are not generally regarded as exploitable in asset allocation studies. Armed with the insights from this model, suitable for heavy duty application in pricing contingent claims based on default, we return to the simpler problem of modelling corporate bond portfolios. We suggest that complexity in these models inevitable, given that a rebalancing investment process must be modelled and that there is a fundamental arbitrariness in the relevant grade categories on which the process is based. Having considered these issues we suggest that, despite its sledge-hammer appearance the Merton Model provides a solid foundation for alternative approaches to modelling such portfolios that ensures consistency and reduces the risk of anomalies. In particular we reconcile well-known approximations in terms of special cases of this model. 1

After credit risk, liquidity risk is probably the next most important risk faced by the finance