Professor Susan Thorp

Biography

Professor Susan Thorp holds the Chair of Finance and Superannuation at the University of Technology, Sydney. The Chair is funded by the Sydney Financial Forum (through Colonial First State Global Asset Management), the NSW Government, the Association of Superannuation Funds of Australia (ASFA), the Industry Superannuation Network (ISN), and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality within the UTS Business School.
Susan’s research focuses on retirement savings and long-horizon wealth management, with particular interest in consumer decision making. Susan is a Chief Investigator on three current Australian Research Council projects studying member choices in superannuation. Her publications in leading international journals have included studies of financial market integration, retirement savings portfolio management, annuitisation, retirement income streams, and the features of the Age Pension. She is a member of the Centre for the Study of Choice and the Quantitative Finance Research Centre at UTS, and an associate of the Centre for Applied Macroeconomic Analysis, ANU, and the National Centre for Econometric Research, QUT. Professor Thorp gained her BEc (Hons) from the University of Sydney, and her PhD from the University of New South Wales. She previously worked in the Economic Group at the Reserve Bank of Australia.

Image of Susan Thorp
Professor of Finance and Superannuation, Finance Discipline Group
Core Member, Centre for the Study of Choice
Core Member, Quantitative Finance Research Centre
B.Ec. Hons. (USyd), Dip.Ed.(UNE), PhD (UNSW)
Member, Economic Society of Australia
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Phone
+61 2 9514 7784
Fax
+61 2 9514 7711
Room
CM05D.03.36

Research Interests

Pension finance, life-cycle models, applied financial econometrics.

Can supervise: Yes

Econometrics, time series, life-cycle finance

Book Chapters

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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Conference Papers

Eckert, C., Geweke, J., Louviere, J.J., Satchell, S.E. & Thorp, S.J. 2011, 'Economic rationality, risk presentation, and retirement portfolio choice', Financial Management Association Annual Meeting, Denver, USA, October 2011.
Thorp, S.J. 2010, 'Financial decision in turbulent markets', 1st Annual Boulder Summer Conference on Consumer Financial Decision Making, Boulder, Colorado, USA, June 2010.
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.
Silvennoinen, A. & Thorp, S.J. 2009, 'Commodity, stock and bond correlation in calm and crisis: Evidence from smooth transition models', Frontiers in Financial Econometrics Conference, Priceton University, USA, September 2009.
Silvennoinen, A. & Thorp, S.J. 2009, 'Commodity, stock and bond correlations in calm and crisis: Evidence from smooth transition models', FIRN Workshop on Time Series Econometrics, Sydney, Australia, November 2009.
Bateman, H., Louviere, J.J., Islam, T., Satchell, S.E. & Thorp, S.J. 2009, 'Retirement investor risk tolerance when risk is range: Experimental survey evidence from tranquil and crisis periods', Econometrics Society Australasian Meetings, Canberra, Australia, July 2009.
Thorp, S.J., Hulley, H., McKibbin, R. & Pedersen, A. 2009, 'Means-tested income support, portfolio choice and decumulation in retirement', 17th Australian Colloquium of Superannuation Researchers, Sydney, Australia, July 2009.
Thorp, S.J., Hulley, H., McKibbin, R. & Pedersen, A. 2009, 'Means-tested income support, portfolio choice and decumulation in retirement', Seminar Presentation, School of Economics, Australian National University, Canberra, Australia, October 2009.
Thorp, S.J. 2009, 'An experimental survey of investment decisions for retirement savings', Networks Financial Institute Conference on Financial Literacy and Financial Education, Indianapolis, USA, May 2009.
Thorp, S.J. 2009, 'An experimental survey of investment decisions for retirement savings', Seminar Presentation, School of Economics and Finance, University of Tasmania, Hobart, Australia, March 2009.
Thorp, S.J. 2008, 'Discounting and consumption under uncertain horizons: Drawdown plans for family trusts', ESAM08: 2008 Australasian Meeting of the Econometric Society, Wellington, New Zealand, July 2008.
Thorp, S.J. 2008, 'Unobservable shocks as carriers of contagion', National Centre for Econometric Research Workshop, Brisbane, Australia, July 2008.
Dungey, M., Milunovich, G. & Thorp, S.J. 2008, 'Unobservable shocks as carriers of contagion', Workshop on Financial Econometrics, Brisbane, Australia, July 2008.
Satchell, S. & Thorp, S.J. 2008, 'Scenario analysis with recursive utility: Dynamic consumption plans for charitable endowments', Symposium on Endowment Management, European Finance Association Meetings, Athens, Greece, August 2008.
Thorp, S.J. 2008, 'An experimental survey of investment decisions for retirement savings', Seminar Presentation, Macquarie University, Sydney, Australia, November 2008.
Satchell, S. & Thorp, S.J. 2008, 'Discounting and consumption over an uncertain horizon: Draw-down plans for family trusts', Econometrics Society Australasian Meetings 2008, Wellington, New Zealand, July 2008.
Satchell, S. & Thorp, S.J. 2008, 'Discounting and consumption over an uncertain horizon: Draw-down plans for family trusts', Seminar Presentation, School of Economics and Finance, Queensland University of Technology, Brisbane, Australia, April 2008.
Menzies, G.D. & Thorp, S.J. 2008, '"The storyboard approach to lectures and presentations" and "Peer feedback: A pilot study" Teaching tools from the international teachers programme', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia, June 2008.
We give two short presentations. The first shows how to build persuasive and coherent visual presentations using the Storyboard Approach. The second describes and demonstrates the power of peer feedback for teaching development using our own recent experience from a pilot project. Please come and join the discussion.
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.
Bateman, H. & Thorp, S.J. 2007, 'Choices and constraints over retirement income streams: Comparing rules and regulations', 15th Colloquim of Superannuation Researchers, Sydney, Australia, July 2007.
Bateman, H. & Thorp, S.J. 2007, 'Choices and constraints over retirement income streams: Comparing rules and regulations', 12th Melbourne Money and Finance Conference, Melbourne, Australia, May 2007.
Dungey, M., Milunovich, G. & Thorp, S.J. 2007, 'Asset market linkages using structural GARCH identification', 5th Infiniti Conference on International Integration, Dublin, Ireland, June 2007.
Petrichev, K. & Thorp, S.J. 2007, 'Valuing basic pensions', 11th Annual Conference of the Asia-Pacific Risk and Insurance Association, Taipei, Taiwan, July 2007.
Bateman, H. & Thorp, S.J. 2006, 'Decentralised investment management: An analysis of non-profit pension funds', 17th Annual Asian Finance Association/ FMA Conference, Auckland, New Zealand, July 2006 in 17th Annual Asian Finance Association/ FMA Conference, ed -, Asian Finance Association, Auckland, New Zealand, pp. 1-34.
Bateman, H. & Thorp, S.J. 2006, 'Decentralised investment management: An analysis of non-profit pension funds', FMA Annual Meeting, Salt Lake City, USA, October 2006 in Proceedings of the 2006 FMA Annual Meeting, ed -, FMA, Salt Lake City, pp. 1-44.
Thorp, S.J. & Milunovich, G. 2006, 'Asymmetric risk and international portfolio choice', FMA Annual Meeting, Salt Lake City, USA, October 2006 in Proceding of the 2006 FMA Annual Meeting, ed -, FMA, Salt Lake City, USA, pp. 1-37.
Thorp, S.J. 2006, 'Asymmetric risk and international portfolio choice', Ausralasian Meeting of the Econometric Society, Alice Spring, Australia, July 2006 in Ausralasian Meeting of the Econometric Society.
Thorp, S.J. 2006, 'Information processing and measures of integration: New York, London and Tokyo', 4th Infiniti Conference on Financial Market Integration, Dublin, Ireland, June 2006 in 4th Infiniti Conference on Financial Market Integration.
Bateman, H. & Thorp, S.J. 2006, 'Decentralised investment management: An analysis of non-profit pension funds.', 17th Annual Asian Finance Association/ FMA Conference, Auckland, New Zealand, July 2006.
Thorp, S.J. 2006, 'Symmetric versus asymmetric conditional covariance forecasts: Does it pay to switch?', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia, November 2006.
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. Investors who are moderately risk averse, have longer rebalancing horizons, and who hold US 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.
Thorp, S.J. & Bateman, H. 2006, 'Decentralized investment management: An analysis of non-profit pension funds', Cambridge Endowment for Research in Finance Seminar, Judge Business Institute, Cambridge, Cambridge, UK, April 2006.
Thorp, S.J. 2006, 'Symmetric versus asymmetric conditional covariance forecasts', Cambridge Finance Seminars, Trinity College, Cambridge, Cambridge, UK, May 2006.
Thorp, S.J. 2005, 'Discussion of R Bowden and J Zhu "Asymmetric hedging of the corporate terms of trade"', ANU-UWA PhD Conference in Economics and Business, Perth, Australia, November 2005 in ANU-UWA PhD Conference in Economics and Business, ed -, -, -.
Thorp, S.J. 2005, 'Asymmetric risk and international portfolio choice', 13th Australian Colloquim of Superannuation Researchers, Sydney, Australia, July 2005 in 13th Australian Colloquim of Superannuation Researchers, ed -, -, -.
Thorp, S.J. 2005, 'Valuing volatility spillovers', Global Finance Conference, Dublin, Ireland, June 2005 in 2005 Global Finance Conference, ed -, -, -.
Thorp, S.J. 2004, 'That courage is not inconsistent with caution: Foreign currency hedging for superannuation funds"', Australasian Meeting of the Econometric Society 2004, Melbourne, Australia, July 2004.
Kingston, G. & Thorp, S.J. 2004, 'Annuitization and asset allocation with HARA utility', 3rd Annual IFID Centre Conference: Asset Allocation and Mortality, Toronto, Canada, April 2004.
Kingston, G. & Thorp, S.J. 2004, 'Annuitization and asset allocation with HARA utlity', Australasian Meeting of the Econometric Society, Melbourne, Australia, July 2004.
Thorp, S.J. 2003, 'Financial engineering for Australian annuitants', 11th Australian Colloquium of Superannuation Researchers, Sydney, Australia, July 2003.
Thorp, S.J. 2002, 'Investing internationally: Currency issues for superannuation funds', 10th Australian Colloquium of Superannuation Researchers, Sydney, Australia, July 2002.
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.

Journal Articles

Bateman, H., Eckert, C., Geweke, J., Louviere, J.J., Satchell, S.E. & Thorp, S.J. 2014, 'Financial competence, risk presentation and retirement portfolio preferences', Journal of Pension Economics and Finance, vol. 13, no. 1, pp. 27-61.
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Hulley, H., McKibbin, R., Pedersen, A. & Thorp, S.J. 2013, 'Means-tested public pensions, portfolio choice and decumulation in retirement', The Economic Record, vol. 89, no. 284, pp. 31-51.
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Age Pension means-testing buffers retired households against shocks to wealth and may influence decumulation patterns and portfolio allocations. Simulations from a simple model of optimal consumption and allocation strategies for a means-tested retired household indicate that, relative to benchmark, eligible and near-eligible households should optimally decumulate faster, and choose more risky portfolios, especially early in retirement. Empirical modelling of a Household, Income and Labour Dynamics in Australia panel of pensioner households confirms a riskier portfolio allocation by wealthier retired households. Poorer pensioner households decumulate at around 5 per cent p.a. on average; however, better-off households continue to add around 3 per cent p.a. to wealth, even when facing a steeper implicit tax rate on wealth.
Silvennoinen, A. & Thorp, S.J. 2013, 'Financialization, crisis and commodity correlation dynamics', Journal of International Financial Markets, Institutions & Money, vol. 24, pp. 42-65.
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Stronger investor interest in commodities may create closer integration with conventional asset markets. We estimate sudden and gradual changes in correlation between stocks, bonds and commodity futures returns driven by observable financial variables and time, using double smooth transition conditional correlation (DSTCC+GARCH) models. Most correlations begin the 1990s near zero but closer integration emerges around the early 2000s and reaches peaks during the recent crisis. Diversification benefits to investors across equity, bond and stock markets were significantly reduced. Increases in VIX and financial traders+ short open interest raise futures returns volatility for many commodities. Higher VIX also increases commodity returns correlation with equity returns for about half the pairs, indicating closer integration.
Agnew, J., Bateman, H. & Thorp, S.J. 2013, 'Superannuation knowledge and plan behaviour', JASSA, vol. 2013, no. 1, pp. 45-50.
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This paper presents new evidence from a national survey which indicates that working age Australians often are ill-informed about many important features of the superannuation system, and the results from regression analysis suggest a relationship between superannuation knowledge and savings behaviour. The results provide motivation for further research in the area and suggest more can be done to educate individuals about the superannuation system.
Agnew, J., Bateman, H. & Thorp, S.J. 2013, 'Work, money, lifestyle: Plans of Australian retirees', JASSA, vol. 2013, no. 1, pp. 40-44.
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Existing research shows that adjustment to retirement is correlated with pre-retirement planning. This study presents new insights into the retirement preparedness of Australians at the later stages of working life. Recent surveys of those approaching and entering retirement show that the extent of planning around exiting the workforce, financial management, bequest provision and activities during retirement vary greatly. We find that more than half of Australians in their 50s and 60s have not planned key aspects of retirement.
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.
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Does diversification using a basket of the most common alternative investments outperform diversification using low-cost, liquid risk premia? Investment banks have recently begun offering access to such risk premia at low cost. First, the authors confirm that alternative assets may reduce portfolio risk, based on historical experience. Second, they compare the risk-reduction benefits of alternative investments and risk premium portfolios out of sample, using equally weighted and least-risk optimized portfolios. They find that risk premia diversify more efficiently than do alternative asset portfolios. The authors suggest that an optimal portfolio combines the benefits of both risk premium and alternative asset portfolios, as some alternative assets (such as timber or managed futures) continue to provide exposure to unique sources of return.
Agnew, J., Bateman, H. & Thorp, S.J. 2013, 'Financial literacy and retirement planning in Australia', Numeracy, vol. 6, no. 2, pp. 1-25.
Financial literacy and numeracy are closely tied. Furthermore, financial literacy has been shown to relate to important financial behaviors. This study examines the relationship between financial literacy and retirement planning using a measure that includes questions requiring numeracy. We implement a customized survey to a representative sample of 1,024 Australians. Overall, we find aggregate levels of financial literacy similar to comparable countries with the young, least educated, those not employed, and those not in the labor force most at risk. Our financial literacy measure is positively related to retirement planning in our sample.
Bateman, H., Eckert, C., Geweke, J., Louviere, J.J., Satchell, S. & Thorp, S.J. 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.
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., 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).
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., 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.
Bush, S.A., Menzies, G.D. & Thorp, S.J. 2009, 'An array of online teaching tools', Teaching Statistics, vol. 31, no. 1, pp. 17-20.
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The Internet offers a huge array of teaching resources for statistics. Here we present a selection of engaging Web-based tools, ranging from class surveys to individual simulation experiments.
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. 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.
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. 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.
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. 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.

Other research activity

Silvennoinen, A. & Thorp, S.J. 2010, 'Financialization, crisis and commodity correlation dynamics', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
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Research Paper Number: 267 Abstract: We study bi-variate conditional volatility and correlation dynamics for individual commodity futures and financial assets from May 1990-July 2009 using DSTCC-GARCH (Silvennoinen and Terasvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and financial traders open positions. We observe higher and more variable correlations between commodity futures and financial asset returns, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.
Thorp, S.J., Hulley, H., McKibbin, R. & Pedersen, A. 2009, 'Means-tested income support, portfolio choice and decumulation in retirement', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney, Quantitative Finance Research Centre, University of Technology, Sydney, Sydney, Australia.
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Research Paper Number: 248 Abstract: We investigate the impact of means tested public income transfers on post-retirement decumulation and portfolio choice using theoretical simulations and panel data on Australian Age Pensioners. Means tested public pension payments in Australia have broad coverage and give insight into the incentive responsiveness of well-o-, as well as poorer households. Via numerical solutions to a discrete time, fi?nite horizon dynamic programming problem, we simulate the optimal consumption and portfolio allocation strategies for a retired household subject to assets and income tests. Relative to benchmark, means tested households should optimally decumulate faster early in retirement, and choose more risky portfolios. Panel data tests on inferred wealth for pensioner households show evidence of more rapid spending early in retirement. However they also show that better-o- households continue to accumulate, even when facing a steeper implicit tax rate on wealth than applies to poorer households. Wealthier households also hold riskier portfolios. Results from tests for Lorenz dominance of the panel wealth distribution show no decrease in wealth inequality over the ?five years of the study.
Bateman, H., Louviere, J.J., Thorp, S.J. & Islam, T. 2009, 'Retirement investor risk tolerance when risk is range: Experimental survey evidence from tranquil and crisis periods', Working Paper, Centre for the Study of Choice, University of Technology, Sydney.
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Working paper number: 09-003
Bateman, H., Louviere, J.J., Thorp, S.J., Islam, T. & Satchell, S. 2009, 'An experimental survey of investment decisions for retirement savings', Working Paper, Centre for the Study of Choice, University of Technology, Sydney.
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Working paper number: 09-001
Menzies, G.D., Pratt, J., Thorp, S.J. & Docherty, P.T. 2008, 'Piloting a Peer Feedback Program in the Faculty of Business at UTS (154)', Working Paper Series, School of Finance and Economics, UTS, pp. 1-12.
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This paper outlines the trial and development of a peer review program for teaching improvement in the Faculty of Business at the University of Technology, Sydney (UTS). It first explores some of the key issues in the purpose and design of peer review schemes. It agrees with a strong theme in the peer review literature that peer review is most effective when used for quality enhancement rather than quality assurance in the sense used by Lomas and Nicholls (2005). It also recognises the possibility of resistance from academic staff to the idea of peer review and scepticism about its usefulness. A methodology for the conduct of a pilot peer review scheme is outlined drawing on the work of Bingham and Ottewill (2001) and Puget and Schubert (2008) in which peer review is voluntary, confidential and reciprocal involving a mutual arrangement with a trusted colleague to observe each other++s teaching and to offer private constructive feedback within agreed parameters. The experience of participants in the pilot scheme is reported and observations made about both the process of peer review itself and of attempting to establish a peer review program in a Faculty not previously used to such methods of professional and educational development.
Dungey, M., Milunovich, G. & Thorp, S.J. 2008, 'Unobservable shocks as carriers of contagion: A dynamic analysis using identified structural GARCH', National Centre for Econometric Research, National Centre for Econometric Research, Brisbane, Queensland.
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Working paper number: 22 Abstract: Markets in financial crisis may experience heightened sensitivity to news from abroad and they may also spread turbulence into foreign markets, creating contagion. We use a structural GARCH model to separate and measure these two parts of crisis transmission. Unobservable structural shocks are named and linked to source markets using variance decompositions, allowing clearer interpretation of impulse response functions. Applying this method to data from the Asian crisis, we find significant contagion from Hong Kong to nearby markets but little heightened sensitivity. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crisis, whereas Indonesia's influence shrinks.
Bateman, H. & Thorp, S.J. 2007, 'Choices and constraints over retirement income streams: Comparing rules and regulations', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney, Quantitative Finance Research Centre, University of Technology, Sydney, Sydney, Australia.
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Research Paper Number: 200 Abstract: 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++ and the previous legislated minimum drawdown limits for allocated pensions. We find that the new regulations are a substantial improvement on the previous rules for allocated pensions and, when compared with the four 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 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 rules.
Satchell, S.E. & Thorp, S.J. 2007, 'Discounting and consumption over an uncertain horizon: Draw-down plans for family trusts', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney, Quantitative Finance Research Centre, UTS, UTS, pp. 1-34.
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Research Paper Number: 210 Abstract: Individuals, endowments and trusts face uncertain lifetimes. When the planning horizon of an entity is stochastic and Pareto distributed, hyperbolic discounting and time-varying consumption rates are optimal. We derive expressions for the optimal rate of consumption (draw-down) from wealth for family trusts facing positive probabilities of extinction at each generation. Using birth statistics for the UK, we compute family extinction probabilities and show that they are well-approximated by a Pareto distribution, hence family trusts will discount hyperbolically. Numerically optimised consumption paths for family trusts with CRRA preferences are decreasing but always higher than for infinitely-lived trusts.
Petrichev, K. & Thorp, S.J. 2007, 'The private value of public pensions', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney, Quantitative Finance Research Centre, University of Technology, Sydney, Sydney, Australia.
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Research Paper Number: 211 Abstract: Individual retirement savings accounts are replacing or supplementing public basic pensions. However at decumulation, replacing the public pension with an equivalent private sector income stream may be costly. We value the Australian basic pension by calculating the wealth needed to generate an equivalent payment stream using commercial annuities or phased withdrawals, but still accounting for investment and longevity risks. At age 65, a retiree needs an accumulation of about 8.5 years earnings to match the public pension in real value and insurance features. Increasing management fees by 1% raises required wealth by about one year's earnings. Delaying retirement by 5 years lowers required wealth by about one half year's earnings. Phased withdrawals have money's worth ratios close to 0.5 suggesting that private replacement costs are high.
Bateman, H. & Thorp, S.J. 2005, 'Decentralised portfolio management: analysis of Australian accumulation funds (QFRC paper #161)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp161.pdf
Thorp, S.J. & Milunovich, G. 2005, 'Asymmetric risk and international porfolio choice (QFRC paper #160)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp161.pdf
Milunovich, G. & Thorp, S.J. 2005, 'Valuing volatility spillovers (Dept of Economics, Macquarie University, paper #612005)'.