TY - BOOK

T1 - Preferences, behaviour and the design of financial contracts

AU - Nordfang, Maj-Britt

PY - 2017

Y1 - 2017

N2 - Today's insurance and nancial markets are characterized by and ever increasingcomplexity and product choice. How do we assist individual household consumersin making informed choices about their nancial positions in these markets? Thisthesis consists of ve separate research papers that are all in some way concernedwith the design and regulation of nancial contracts in relation to consumer preferencesunder uncertainty. First, the design of mortgage products in relation toconsumer preferences in a market with a stochastic interest rate is examined. Wederive the (extreme) characteristics of an investor who optimally chooses either axed rate mortgage or an adjustable rate mortgage. We also show how adjustablerate mortgages by construction have a build-in cap on the adjustable rate in contrastto what could be perceived from standard nancial advice. Next, optimalinvestments of an investor with time-inconsistent preferences in a Black-Scholesmarket is explored. We derive the optimal investment strategy of an investor witha scaled mean-variance objective and derive an approximation to the optimal investmentstrategy of an investor who continuously measures utility with respectsto an updated wealth-dependent reference point. Finally, the implications of aban on risk-classication in an insurance market with a low-risk and high-riskcustomer groups with homogeneous utility preferences is examined and discussed.We illustrate how solidarity in premiums between the low- and a high-risk group ofinsurance customers may lower the premiums of the high-risk customers withoutaecting the premium level of the low-risk customers when a solvency capital requirementis imposed. The papers highlight how the risk preferences of individualconsumers relate to the design of nancial contracts and the regulation thereof.It is our intention that the insights gained in the thesis contributes to a betterunderstanding of the complex nancial decisions faced by individual consumerstoday.

AB - Today's insurance and nancial markets are characterized by and ever increasingcomplexity and product choice. How do we assist individual household consumersin making informed choices about their nancial positions in these markets? Thisthesis consists of ve separate research papers that are all in some way concernedwith the design and regulation of nancial contracts in relation to consumer preferencesunder uncertainty. First, the design of mortgage products in relation toconsumer preferences in a market with a stochastic interest rate is examined. Wederive the (extreme) characteristics of an investor who optimally chooses either axed rate mortgage or an adjustable rate mortgage. We also show how adjustablerate mortgages by construction have a build-in cap on the adjustable rate in contrastto what could be perceived from standard nancial advice. Next, optimalinvestments of an investor with time-inconsistent preferences in a Black-Scholesmarket is explored. We derive the optimal investment strategy of an investor witha scaled mean-variance objective and derive an approximation to the optimal investmentstrategy of an investor who continuously measures utility with respectsto an updated wealth-dependent reference point. Finally, the implications of aban on risk-classication in an insurance market with a low-risk and high-riskcustomer groups with homogeneous utility preferences is examined and discussed.We illustrate how solidarity in premiums between the low- and a high-risk group ofinsurance customers may lower the premiums of the high-risk customers withoutaecting the premium level of the low-risk customers when a solvency capital requirementis imposed. The papers highlight how the risk preferences of individualconsumers relate to the design of nancial contracts and the regulation thereof.It is our intention that the insights gained in the thesis contributes to a betterunderstanding of the complex nancial decisions faced by individual consumerstoday.

UR - https://soeg.kb.dk/permalink/45KBDK_KGL/fbp0ps/alma99122710995505763

M3 - Ph.D. thesis

BT - Preferences, behaviour and the design of financial contracts

PB - Department of Mathematical Sciences, Faculty of Science, University of Copenhagen

ER -