Competition between HMO and PPO: A Two-Sided Market Approach

We set-up a two-sided market framework to model competition between a Prefered Provider Organization (PPO) and a Health Maintenance Organization (HMO). Both health plans compete to attract policyholderson one side and providers on the other side. The PPO, which is characterized by a higher diversity of providers, attracts riskier policyholders. Our two-sided framework allows to examine the consequences of this risk segmentation on the providers’ side, especially in terms of remuneration. The outcome of competition mainly depends on two effects: a demand effect, influenced by the value put by policyholders on providers access and an adverse selection effect, captured by the characteristics of the health risk distribution. If the adverse selection effect is too strong, the HMO gets a higher profit in equilibrium. On the contrary, if the demand effect dominates, the PPO profit is higher in spite of the unfavorable risk segmentation. We believe that our model, by highlighting the two-sided market structure of the health plans’ competition, provides new insights to understand the increase in the PPOs’ market share observed during the last decade in the US.

Biased selection within the social health insurance market in Colombia

Las regulaciones como primaje comunitario, paquetes estandarizados y afiliación abierta, orientadas a reducir el impacto de las fallas en los mercados de seguros, tienen un efecto limitado puesto que abren espacio a la selección sesgada. A partir de 1993, el sistema de seguridad social en salud en Colombia fue reformado hacia un enfoque de mercado con la expectativa de mejorar el desempeño de los monopolios preexistentes exponiéndolos a la competencia de nuevos entrantes. La hipótesis que se maneja en el trabajo es que las fallas de mercado pueden llevar a selección sesgada favoreciendo a los nuevos entrantes. Se analizaron dos encuestas de hogares utilizando el estado de salud auto reportado y la presencia de enfermedad crónica como indicadores prospectivos del riesgo de los afiliados. Se encuentra que hay selección sesgada, llevando a selección adversa entre los aseguradores preexistentes, y a selección favorable entre los nuevos entrantes. Este patrón se observa en 1997 y se incrementa en el 2003. Aunque las entidades preexistentes son entidades públicas, y su tamaño disminuyó sustancialmente entre estos años, se analizan sus implicaciones fiscales en términos de financiación adicional por parte del gobierno.

Stock return comovements and integration within the Latin American integrated market

Financial integration has been pursued aggressively across the globe in the last fifty years; however, there is no conclusive evidence on the diversification gains (or losses) of such efforts. These gains (or losses) are related to the degree of comovements and synchronization among increasingly integrated global markets. We quantify the degree of comovements within the integrated Latin American market (MILA). We use dynamic correlation models to quantify comovements across securities as well as a direct integration measure. Our results show an increase in comovements when we look at the country indexes, however, the increase in the trend of correlation is previous to the institutional efforts to establish an integrated market in the region. On the other hand, when we look at sector indexes and an integration measure, we find a decreased in comovements among a representative sample of securities form the integrated market.

Bayes estimates of distance-to-market: Transactions costs, cooperatives and milk-market development in the Ethiopian highlands

Rationalizing non-participation as a resource deficiency in the household, this paper identifies strategies for milk-market development in the Ethiopian highlands. The additional amounts of covariates required for Positive marketable surplus -'distances-to market'-are computed from a model in which production and sales are correlated; sales are left-censored at some Unobserved thresholds production efficiencies are heterogeneous: and the data are in the form of a panel. Incorporating these features into the modeling exercise ant because they are fundamental to the data-generating environment. There are four reasons. First, because production and sales decisions are enacted within the same household, both decisions are affected by the same exogenous shocks, and production and sales are therefore likely to be correlated. Second. because selling, involves time and time is arguably the most important resource available to a subsistence household, the minimum Sales amount is not zero but, rather, some unobserved threshold that lies beyond zero. Third. the Potential existence of heterogeneous abilities in management, ones that lie latent from the econometrician's perspective, suggest that production efficiencies should be permitted to vary across households. Fourth, we observe a single set of households during multiple visits in a single production year. The results convey clearly that institutional and production) innovations alone are insufficient to encourage participation. Market-precipitating innovation requires complementary inputs, especially improvements in human capital and reductions in risk. Copyright (c) 20 08 John Wiley & Sons, Ltd.

Risk accountability in the tender process of contractors in Ghana and UK

The process of how contractors take account of risk when calculating their bids for construction work is investigated based on preliminary investigations and case studies in Ghana and UK. Ghana and UK were chosen, more or less arbitrarily, for the purpose of case studies, and to test the idea that there are systematic differences between the approaches in different places. Clear differences were found in the risk pricing approaches of contractors in the two countries. The difference appeared to emanate from the professional knowledge and competence of the bid team members, company policy, corporate accountability and the business environments in which the contractors operate. Both groups of contractors take account of risk in estimates. However, risk accountability was found to be higher on the agenda in the tender process of UK contractors, documented more systematically, and assessed and managed more rigorously with input from the whole bid team. Risk accountability takes place at three levels of the tender process and is dictated strongly by market forces and company circumstances.

Real estate investment in global financial centers: risk, return and contagion

Global financial activity is heavily concentrated in a small number of world cities –international financial centers. The office markets in those cities receive significant flows of investment capital. The growing specialization of activity in IFCs and innovations in real estate investment vehicles lock developer, occupier, investment, and finance markets together, creating common patterns of movement and transmitting shocks from one office market throughout the system. International real estate investment strategies that fail to recognize this common source of volatility and risk may fail to deliver the diversification benefits sought.

A comparison of extreme value theory approaches for determining value at risk

This paper compares a number of different extreme value models for determining the value at risk (VaR) of three LIFFE futures contracts. A semi-nonparametric approach is also proposed, where the tail events are modeled using the generalised Pareto distribution, and normal market conditions are captured by the empirical distribution function. The value at risk estimates from this approach are compared with those of standard nonparametric extreme value tail estimation approaches, with a small sample bias-corrected extreme value approach, and with those calculated from bootstrapping the unconditional density and bootstrapping from a GARCH(1,1) model. The results indicate that, for a holdout sample, the proposed semi-nonparametric extreme value approach yields superior results to other methods, but the small sample tail index technique is also accurate.

Systematic property risk: quantifying UK property betas 1983-2005

The increased frequency in reporting UK property performance figures, coupled with the acceptance of the IPD database as the market standard, has enabled property to be analysed on a comparable level with other more frequently traded assets. The most widely utilised theory for pricing financial assets, the Capital Asset Pricing Model (CAPM), gives market (systematic) risk, beta, centre stage. This paper seeks to measure the level of systematic risk (beta) across various property types, market conditions and investment holding periods. This paper extends the authors’ previous work on investment holding periods and how excess returns (alpha) relate to those holding periods. We draw on the uniquely constructed IPD/Gerald Eve transactions database, containing over 20,000 properties over the period 1983-2005. This research allows us to confirm our initial findings that properties held over longer periods perform in line with overall market performance. One implication of this is that over the long-term performance may be no different from an index tracking approach.

Real estate portfolio size and risk reduction

The reduction of portfolio risk is important to all investors but is particularly important to real estate investors as most property portfolios are generally small. As a consequence, portfolios are vulnerable to a significant risk of under-performing the market, or a target rate of return and so investors may be exposing themselves to greater risk than necessary. Given the potentially higher risk of underperformance from owning only a few properties, we follow the approach of Vassal (2001) and examine the benefits of holding more properties in a real estate portfolio. Using Monte Carlo simulation and the returns from 1,728 properties in the IPD database, held over the 10-year period from 1995 to 2004, the results show that increases in portfolio size offers the possibility of a more stable and less volatile return pattern over time, i.e. down-side risk is diminished with increasing portfolio size. Nonetheless, increasing portfolio size has the disadvantage of restricting the probability of out-performing the benchmark index by a significant amount. In other words, although increasing portfolio size reduces the down-side risk in a portfolio, it also decreases its up-side potential. Be that as it may, the results provide further evidence that portfolios with large numbers of properties are always preferable to portfolios of a smaller size.

Data dilemmas in forecasting European office market rents

This paper uses data provided by three major real estate advisory firms to investigate the level and pattern of variation in the measurement of historic real estate rental values for the main European office centres. The paper assesses the extent to which the data providing organizations agree on historic market performance in terms of returns, risk and timing and examines the relationship between market maturity and agreement. The analysis suggests that at the aggregate level and for many markets, there is substantial agreement on direction, quantity and timing of market change. However, there is substantial variability in the level of agreement among cities. The paper also assesses whether the different data sets produce different explanatory models and market forecast. It is concluded that, although disagreement on the direction of market change is high for many market, the different data sets often produce similar explanatory models and predict similar relative performance.

The transition of the Polish real estate market within a Central and Eastern European context

The real estate market in Poland is a relatively immature market, but one that has been experiencing substantial transformation. The development of the market has been encouraged by a number of factors, including changes arising as a result of new legislation and the migration of capital between capital markets. The progress of the real estate sector towards a western style competitive market has taken place within the gradual transformation of the Polish economy into a free market economy. As investment grade property is in relatively short supply in Poland, investors consider opportunities within the wider CEE block. An analysis of the risk-return characteristics of the three largest CEE real estate markets namely, Poland, Hungary and Czech Republic, shows that the returns in these markets have been negatively correlated with the UK. As these economies and markets evolve, and being part of the wider EU trading block, their economic performance will slowly converge and become more synchronized with their western counterparts. However, the catch-up of the CEE markets to western European performance cycles will be protracted and consequently there are likely to be significant ongoing portfolio risk reduction opportunities

Risk management and the corporate real estate portfolio

In a global business economy, firms have a broad range of corporate real estate needs. During the past decade, multiple strategies and tactics have emerged in the corporate real estate community for meeting those needs. We propose here a framework for analysing and prioritising the various types of risk inherent in corporate real estate decisions. From a business strategy perspective, corporate real estate must serve needs beyond the simple one of shelter for the workforce and production process. Certain uses are strategic in that they allow access to externalities, embody the business strategy, or provide entrée to new markets. Other uses may be tactical, in that they arise from business activities of relatively short duration or provide an opportunity to pre-empt competitors. Still other corporate real estate uses can be considered “core” to the existence of the business enterprise. These might be special use properties or may be generic buildings that have become embodiments of the organisation’s culture. We argue that a multi-dimensional matrix approach organised around three broad themes and nine sub-categories allow the decision-maker to organise and evaluate choices with an acceptable degree of rigor and thoroughness. The three broad themes are Use (divided into Core, Cyclical or Casual) – Asset Type (which can be Strategic, Specialty or Generic) and Market Environment (which ranges from Mature Domestic to Emerging Economy). Proper understanding of each of these groupings brings critical variables to the fore and allows for efficient resource allocation and enhanced risk management.

Volatility persistence and time-varying betas in the UK real estate market

This paper investigates the degree of return volatility persistence and the time-varying behaviour of systematic risk (beta) for 31 market segments in the UK real estate market. The findings suggest that different property types exhibit differences in volatility persistence and time variability. There is also evidence that the volatility persistence of each market segment and its systematic risk are significantly positively related. Thus, the systematic risks of different property types tend to move in different directions during periods of increased market volatility. Finally, the market segments with systematic risks less than one tend to show negative time variability, while market segments with systematic risk greater than one generally show positive time variability, indicating a positive relationship between the volatility of the market and the systematic risk of individual market segments. Consequently safer and riskier market segments are affected differently by increases in market volatility.

Portfolio size and the reduction of dispersion: the case of the United Kingdom commercial real estate market

This paper investigates the potential benefits and limitations of equal and value-weighted diversification using as the example the UK institutional property market. To achieve this it uses the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. To evaluate these issues two approaches are adopted; first, an analysis of the correlations within the sectors and regions and secondly simulations of property portfolios of increasing size constructed both naively and with value-weighting. Using these methods it is shown that the extent of possible risk reduction is limited because of the high positive correlations between assets in any portfolio, even when naively diversified. It is also shown that portfolios exhibit high levels of variability around the average risk, suggesting that previous work seriously understates the number of properties needed to achieve a satisfactory level of diversification. The results have implications for the development and maintenance of a property portfolio because they indicate that the achievable level of risk reduction depends upon the availability of assets, the weighting system used and the investor’s risk tolerance.

‘Nudging’ energy users: regulatory measures to address the risk of aggregate peak demand in European electricity markets

For decades regulators in the energy sector have focused on facilitating the maximisation of energy supply in order to meet demand through liberalisation and removal of market barriers. The debate on climate change has emphasised a new type of risk in the balance between energy demand and supply: excessively high energy demand brings about significantly negative environmental and economic impacts. This is because if a vast number of users is consuming electricity at the same time, energy suppliers have to activate dirty old power plants with higher greenhouse gas emissions and higher system costs. The creation of a Europe-wide electricity market requires a systematic investigation into the risk of aggregate peak demand. This paper draws on the e-Living Time-Use Survey database to assess the risk of aggregate peak residential electricity demand for European energy markets. Findings highlight in which countries and for what activities the risk of aggregate peak demand is greater. The discussion highlights which approaches energy regulators have started considering to convince users about the risks of consuming too much energy during peak times. These include ‘nudging’ approaches such as the roll-out of smart meters, incentives for shifting the timing of energy consumption, differentiated time-of-use tariffs, regulatory financial incentives and consumption data sharing at the community level.