Investor compensation fund: an optimal size for countries with developed stock markets and Ukraine

  • 425 Views
  • 66 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

A compensation fund is an effective mechanism for ensuring the protection of individual investors’ investments on the stock market, which confirms the experience of different countries both with the developed stock market and with the emerging markets (USA, UK, France, Czech Republic, Bulgaria, Ireland, Malta).
The formation of a steady interest of individual investors in stock market instruments is stimulated by the implementation of a mechanism for guaranteeing such investments. The stock market of Ukraine faces the problem of attracting additional financing, while individual investors have fairly large amounts of monetary resources that are not involved in the transactions with financial instruments due to the high level of distrust caused by the crisis phenomena on both the global and the national financial markets. The creation of the Ukrainian compensation fund for investment protection involves the development and implementation of a nationwide system for protecting the property interests of investors on the stock market, which requires compensatory payments to the clients of all professional market participants as a result of certain risks.
The main condition for effective functioning of the compensation fund of the stock market is determined by its size, which must meet the following conditions of optimality: to ensure the minimum level of the fund’s risks, to take into account the amounts of contributions for the current period, the amount of maintenance costs and to fulfil the requirements for the financial stability of the fund. A modified Markowitz portfolio model was used to build the model.
The building of the target function and constraints was carried out by using the Statistica software toolkit. The target function and constraints were presented as polynomials of the third degree and calculated with the help of the multiple nonlinear regression. As a result of calculations, an optimization model was developed for determining the size of the compensation fund taking into account these conditions.
The model’s testing was carried out by using the examples of the Deposit Guarantee Fund (DGF) and compensation funds of the United States, Great Britain, France, Czech Republic, Bulgaria, Ireland and Malta. As a result of calculations we determined the size of the compensation fund, which guarantees a minimum level of the fund’s risk taking into account the amount of contributions for the current period, the amount of maintenance costs and requirements to the financial stability of the fund.

view full abstract hide full abstract
    • Figure 1. Distribution of excesses for the regression of standard deviation of the size of the Deposit Guarantee Fund (y) from its volume (x)
    • Figure 2. Distribution of excesses for the regression of contributions of members of the Deposit Guarantee Fund (c) from its volume (x)
    • Figure 3. Distribution of excesses for the regression of estimated costs of the Deposit Guarantee Fund (e) from the volume of the fund (x)
    • Table 1. Output data for calculating the optimal size of the Deposit Guarantee Fund for 2006–2016
    • Table 2. The results of regression for the standard deviation of the size of the Deposit Guarantee Fund (y) from its volume (x)
    • Table 3. The results of regression of contributions from the members of the Deposit Guarantee Fund (c) from its volume (x)
    • Table 4. The results of regression of the estimated costs of the Deposit Guarantee Fund (e) from its volume (x)
    • Table 5. The results of testing of the scientific and methodical approach to optimizing the volume of the Deposit Guarantee Fund, mln. UAH