Professor Susan Thorp

Thorp, S.J., Kingston, G. & Bateman, H. 2007, 'Financial Engineering for Australian Annuitants' in H. Bateman (ed), Retirement Provision in Scary Markets, Edward Elgar, USA, pp. 123-144.
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Agnew, J., Bateman, H. & Thorp, S.J. 2013, 'Superannuation knowledge and plan behaviour', JASSA, vol. 2013, no. 1, pp. 45-50.

Agnew, J., Bateman, H. & Thorp, S.J. 2013, 'Work, money, lifestyle: Plans of Australian retirees', JASSA, vol. 2013, no. 1, pp. 40-44.

Bird, R.G., Liem, H. & Thorp, S.J. 2013, 'The tortoise and the hare: Risk premium versus alternative asset portfolios', Journal of Portfolio Management, vol. 39, no. 3, pp. 112-122.

Hulley, H., McKibbin, R., Pedersen, A. & Thorp, S.J. 2013, 'Means-tested public pensions, portfolio choice and decumulation in retirement', Economic Record, vol. 89, no. 284, pp. 31-51.
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Silvennoinen, A. & Thorp, S.J. 2013, 'Financialization, crisis and commodity correlation dynamics', Journal of International Financial Markets, Institutions and Money, vol. 24, pp. 42-65.
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Bateman, H., Eckert, C., Geweke, J., Louviere, J.J., Thorp, S.J. & Satchell, S. 2012, 'Financial competence and expectations formation: Evidence from Australia', The Economic Record, vol. 88, no. 280, pp. 39-63.
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We study the financial competence of Australian retirement savers using self-assessed and quantified measures. Responses to financial literacy questions show large variation and compare poorly with some international surveys. Basic and sophisticated financial literacy vary significantly with most demographics, self-assessed financial competence, income, superannuation accumulation and net worth. General numeracy scores are largely constant across gender, age, higher education and income. Financial competence also significantly affects expectations of stock market performance. Using a discrete choice model, we show that individuals with a higher understanding of risk, diversification and financial assets are more likely to assign a probability to future financial crises rather than expressing uncertainty.

Bateman, H., Islam, T., Louviere, J.J., Satchell, S.E. & Thorp, S.J. 2011, 'Retirement Investor Risk Tolerance in Tranquil and Crisis Periods: Experimental Survey Evidence', Journal of Behavioral Finance, vol. 12, no. 4, pp. 201-218.
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The impact of the global financial crisis of 2008 and 2009 on private pension assets has been severe. Asset prices crashed on a scale not seen since the Great Depression of the 1930s. The OECD estimates that global assets accumulated to finance retirement fell by 20-25% over 2008. Ireland felt the greatest impact, where pension assets fell by around 35%, but the United States was close behind with an estimated decline of 25-30%, followed by falls of around 20% in Canada and Australia (Antolin & Stewart 2009). Individual pension accumulations felt the brunt of the impact: in the United States, the average defined contribution plan balance fell by 16%, from $31,800 in 2007 to $26,578 by mid 2009 (Copeland 2009).

Satchell, S. & Thorp, S.J. 2011, 'Uncertain survival and time discounting: Intertemporal consumption plans for family trusts', Journal of Population Economics, vol. 24, no. 1, pp. 239-266.
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We derive expressions for optimal consumption for family trusts with random wealth and uncertain survival. Using UK birth statistics and the theory of branching processes, we compute size and survival probabilities for single- and multiple-branch families. Survival for a single-branch family is approximated by a Pareto distribution and consumption policies exhibit decreasing discount rates, but multiple-branch families use non-monotonic discount rates. When trust distributions depend on the number of beneficiaries rather than the survival of the whole family unit, spending paths depend on expected membership and the elasticity of intertemporal substitution. We report examples of consumption paths for a range of family trusts with constant relative risk aversion preferences.

Bateman, H., Louviere, J.J., Thorp, S.J., Islam, T. & Satchell, S. 2010, 'Investment decisions for retirement savings', Journal of Consumer Affairs, vol. 44, no. 3, pp. 463-482.
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We conducted a choice experiment to investigate whether retirement savers follow simple portfolio theory when choosing investments. We modeled experimental survey data on 693 participants using a scale-adjusted version of the latent class choice model. Results show that underlying variability in response was explained by age and +risk profile+ score and that preferences varied with income and age. Younger individuals were conventionally risk averse, but older, higher-income individuals may react positively to both higher returns and increasing risk, when risk is presented as widening ranges of possible outcomes. Respondents tended to choose among a few similar investment options.

Dungey, M., Milunovich, G. & Thorp, S.J. 2010, 'Unobservable shocks as carriers of contagion', Journal of Banking and Finance, vol. 34, no. 5, pp. 1008-1021.
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We propose an identified structural GARCH model to disentangle the dynamics of financial market crises. We distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non-crisis markets, and the contagion imported to a tranquil domestic market from foreign crises. The model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses. To illustrate, we apply the method to data from the 1997+1998 Asian financial crisis which consists of a complicated set of interacting crises. We find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects.

Bateman, H. & Thorp, S.J. 2008, 'Choices and Constraints Over retirement Income Streams: Comparing Rules and Regulations', The Economic Record, vol. 84, no. Special, pp. 17-31.
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The new Simplified Superannuation regulations for Australian superannuation provide tax concessions to retirement income streams which comply with legislated minimum drawdown rules. We evaluate these new drawdown rules against four alternatives, including three formula-based `rules of thumb+ used by financial planners. We find that the new regulations are a substantial improvement on the previous rules for allocated pensions and, when compared with the formula-based rules, are a good compromise in terms of simplicity, adequacy and risk. We also find that welfare is lower for most individuals who follow the Simplified Superannuation rules compared with welfare under an optimal path or a simple fixed percentage drawdown rule, but that outcomes could be improved through a further simplification of the new rules.

Petrichev, K. & Thorp, S.J. 2008, 'The Private Value of Public Pensions', Insurance: Mathematics and Economics, vol. 42, no. 3, pp. 1138-1145.
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As individual retirement savings accounts replace public pensions and defined benefit schemes, more retirees will decumulate using commercial income streams rather than public or corporate annuities. Here we use an approximation to the retirement income problem [Huang, H., Milevsky, M.A., Wang, J., 2004. Ruined moments in your life: How good are the approximations? Insurance: Math. Econom. 34, 421+447] to compute the cost of replicating a public real life annuity (the Australian Age Pension) using commercial decumulation products. We treat the public pension as a phased withdrawal plan, matching insurance and payment features, and back out the stochastic present value of the plan under an arbitrarily small ruin probability. To reproduce the pension payment with 99% certainty, a male retiree needs 3.6 times the current average retirement savings account balance, and a female retiree needs more than 10 times the average female account balance. At 95% certainty, required wealth falls by around 25%. We measure separately the impact of gender, investment strategy, retirement age and management fees on this valuation

Bateman, H. & Thorp, S.J. 2007, 'Decentralized investment management: An analysis of non-profit pension funds', Journal of Pension Economics and Finance, vol. 6, no. 1, pp. 21-44.
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We investigate delegated investment management in private pension accounts using data from Australian accumulation (superannuation) funds. In Australian non-profit pension funds, trustees choose investment managers on behalf of members. We find that funds with many delegated managers have higher risk-adjusted returns than those with few. However funds with 13 or less specialized managers show no improvement over funds with a single diversified manager. All do worse than a benchmark portfolio of asset-class indices. Further, by using random selection to mimic the choices of an uninformed individual choosing from the same menu of delegate managers as used by trustees, we show that returns from pension funds with large numbers of trustee-selected managers compare favorably with returns from randomly selected, equally weighted portfolios. However this improvement falls off quickly for funds with fewer trustee-selected managers, or when randomly selected portfolios are also diversified across asset classes. Results indicate that an uninformed individual following a naive diversification strategy would have done as well as most trustee boards in this sample.

Milunovich, G. & Thorp, S.J. 2007, 'Measuring equity market integration using uncorrelated information flows: Tokyo, London and New York', Journal of Multinational Financial Management, vol. 17, no. 4, pp. 275-289.
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Equity markets do not pass all overnight information into prices instantly at the opening of trade. We adjust open-to-close return series for non-instantaneous information absorption and then use adjusted series to measure integration among three major equity markets. Because the adjusted daytime return series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign open-to-close returns, explains 13% of opening price variation (close-toopen returns) in NewYork, 14% in Tokyo and 30% in London. ForNewYork and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetric effects.

Thorp, S.J. & Milunovich, G. 2007, 'Symmetric versus asymmetric conditional covariance forecasts: Does it pay to switch?', Journal of Financial Research, vol. 30, no. 3, pp. 355-377.
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Volatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. Allowing for these asymmetries in covariance forecasts decreases mean-variance portfolio risk and improves investor welfare. We compute optimal weights for international equity portfolios using predictions from asymmetric covariance forecasting models and a spectrum of expected returns. Investorswho are moderately risk averse, have longer rebalancing horizons, and hold U.S. equities benefit most and may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts. Accounting for asymmetry in both variances and correlations significantly lowers realized portfolio risk.

Milunovich, G. & Thorp, S.J. 2006, 'Valuing volatility spillovers', Global Finance Journal, vol. 17, no. 1, pp. 1-22.
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We show that volatility spillovers are large enough to matter to investors. We demonstrate that standard deviations of returns to mean-variance portfolios of European equities fall by 1+1.5% at daily, weekly, and monthly rebalancing horizons when volatility spillovers are included in covariance forecasts. We estimate the conditional second moment matrix of (synchronized) daily index returns for the London, Frankfurt and Paris stock markets via two asymmetric dynamic conditional correlation models (A-DCC): the unrestricted model includes volatility spillovers and the restricted model does not. We combine covariance forecasts from the restricted and unrestricted models with a wide range of assumed returns relatives via a polar co-ordinates method, and compute out-of-sample realized portfolio returns and variances for testing. Diebold+Mariano tests confirm that most risk reductions are statistically significant. Stochastic dominance tests indicate that portfolios accounting for volatility spillover would be preferred by risk adverse agents.

Kingston, G. & Thorp, S.J. 2005, 'Annuitization and asset allocation with HARA utility', Journal of Pension Economics and Finance, vol. 4, no. 3, pp. 225-248.
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Thorp, S.J. 2005, 'That Courage is not Inconsistent with Caution: Currency Hedging for Superannuation Funds', The Economic Record, vol. 81, no. 252, pp. 38-50.
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Surveys of Australian retirement savings funds verify that most international bond holdings, but not equity holdings, have been hedged for currency risk. We compare the mean variance efficiency of this practice with two alternatives: a conventional forward hedge and a selective hedge triggered by the sign of the interest differential. These strategies generate optimal allocations that stochastically dominate restricted equity hedging according to Barrett Donald tests. Advantages of alternative hedging strategies remain when sample mean returns are replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes.

Trevor, R.G. & Thorp, S.J. 1988, 'VAR forecasting models of the Australian economy: A preliminary analysis', Australian Economic Papers, vol. 27, no. SUPP, pp. 108-120.
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Investigates whether extremely cheap and relatively simple vector autoregressive (VAR) models produce sensible forecasts of major Australian macroeconomic variables. Accuracy of ex-ante forecast produced by some representative VAR models; Comparison with other publicly available forecasts; Decisions about the structure of the model in VAR forecasting.

Silvennoinen, A. & Thorp, S.J. 2010, 'Financialization, crisis and commodity correlation dynamics', Financial Management Association Annual Meeting, New York, USA, October 2010 in Financial Management Association 2010 Meetings, ed Anup Agrawal et al, Financial Management Association, New York, USA, pp. 1-47.
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We study conditional volatility and correlation dynamics for returns to commodity fu- tures, stocks and bonds, from May 1990-July 2009 using DSTCC- GARCH. The models allow correlation to vary smoothly between extreme states via transition functions. Expected stock volatility (VIX) and money manager open interest in futures markets are relevant transition variables. Results show increasing integration between commodity futures and stocks: com- modity returns volatility is predicted by common factors but also by .nancial traders.open positions. We observe higher and more variable correlations between commodity futures and stock returns from mid-sample, with many series showing a structural break in the conditional correlation processes from the late 1990s.

Petrichev, K. & Thorp, S.J. 2007, 'Valuing Basic Pensions', Annual Conference of the Asia-Pacific Risk and Insurance Association, Taipei, Taiwan, July 2007 in Proceedings of the 11th Annual Conference of the Asia-Pacific Risk and Insurance Association, ed Lin, J., Asia-Pacific Risk and Insurance Association, Taipei, Taiwan, pp. 1-35.
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Governments around the world are reviewing basic pension systems in the light of increasing demands on public funds. In Australia, Government policy aims to in- crease reliance on private retirement savings and reduce demand on the targeted Age Pension. Using a new analytical valuation method for retirement income streams (Milevsky and Robinson 2005) we value the Age Pension by calculating the amount of wealth needed to sustain an annual draw-down equivalent to the Australian ba- sic pension, if pensioners were to be responsible for generating the income stream themselves. We account for both investment and longevity risk. A 65-year-old sin- gle retiree with average life-expectancy needs retirement wealth equivalent to 8.5 times average annual earnings to replicate the payments and insurance features of the public pension using standard draw-down products. Delaying retirement by 5 years reduces required savings by around 5%, but linking pension payments to earnings growth rather than price in.ation increases required wealth by up to 25%. Commercial single life annuities can replicate the pension more cheaply than the draw-down plans we evaluate, but remain unpopular with retirees. We conclude that the basic pension is very valuable, representing a large notional transfer of wealth at retirement.

Stevens, G. & Thorp, S.J. 1989, 'The relationship between financial indicators and economic activity: Some further evidence', Sydney, Australia, October 1989 in Studies in money and credit, ed I. Macfarlane and G. Stevens, Reserve Bank of Australia, Sydney, Australia.

Stevens, G., Thorp, S.J. & Anderson, J. 1986, 'The Australian demand function for money: Another look at stability', Sydney, Australia, January 1986 in Structural change and economic modelling, Papers and Proceedings of the 7th Pacific Basin Central Bank Conference on Economic Modelling, ed Rankin, Reserve Bank of Australia, Sydney, Australia.