On international cost-sharing of pharmaceutical R&D

Ramsey pricing has been proposed in the pharmaceutical industry as a principle to price discriminate among markets while allowing to recover the (fixed) R&D cost. However, such analyses neglect the presence of insurance or the fund raising costs for most of drug reimbursement. By incorporating these new elements, we aim at providing some building blocks towards an economic theory incorporating Ramsey pricing and insurance coverage. We show how coinsurance affects the optimal prices to pay for the R&D investment. We also show that under certain conditions, there is no strategic incentive by governments to set coinsurance rates in order to shift the financial burden of R&D. This will have important implications to the application of Ramsey pricing principles to pharmaceutical products across countries.

Search-for-yield in Portuguese fixed-income mutual funds and monetary policy

This paper studies the effects of monetary policy on mutual fund risk taking using a sample of Portuguese fixed-income mutual funds in the 2000-2012 period. Firstly I estimate time-varying measures of risk exposure (betas) for the individual funds, for the benchmark portfolio, as well as for a representative equally-weighted portfolio, through 24-month rolling regressions of a two-factor model with two systematic risk factors: interest rate risk (TERM) and default risk (DEF). Next, in the second phase, using the estimated betas, I try to understand what portion of the risk exposure is in excess of the benchmark (active risk) and how it relates to monetary policy proxies (one-month rate, Taylor residual, real rate and first principal component of a cross-section of government yields and rates). Using this methodology, I provide empirical evidence that Portuguese fixed-income mutual funds respond to accommodative monetary policy by significantly increasing exposure, in excess of their benchmarks, to default risk rate and slightly to interest risk rate as well. I also find that the increase in funds’ risk exposure to gain a boost in return (search-for-yield) is more pronounced following the 2007-2009 global financial crisis, indicating that the current historic low interest rates may incentivize excessive risk taking. My results suggest that monetary policy affects the risk appetite of non-bank financial intermediaries.