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Stochastic Optimal Control (SOC)—a mathematical theory concerned with minimizing a cost (or maximizing a payout) pertaining to a controlled dynamic process under uncertainty—has proven incredibly helpful to understanding and predicting debt crises and evaluating proposed financial regulation and risk management. Stochastic Optimal Control and the U.S. Financial Debt Crisis analyzes SOC in relation to the 2008 U.S. financial crisis, and offers a detailed framework depicting why such a methodology is best suited for reducing financial risk and addressing key regulatory issues. Topics discussed include the inadequacies of the current approaches underlying financial regulations, the use of SOC to explain debt crises and superiority over existing approaches to regulation, and the domestic and international applications of SOC to financial crises. Principles in this book will appeal to economists, mathematicians, and researchers interested in the U.S. financial debt crisis and optimal risk management.
This book focuses on the interaction between equilibrium real exchange rates, optimal external debt, endogenous optimal growth and current account balances, in a world of uncertainty. The theoretical parts result from interdisciplinary research between economics and applied mathematics. From the economic theory and the mathematics of stochastic optimal control the author derives benchmarks for the optimal debt and equilibrium real exchange rate in an environment where both the return on capital and the real rate of interest are stochastic variables. The theoretically derived equilibrium real exchange rate - the "natural real exchange rate" NATREX - is where the real exchange rate is heading. These benchmarks are applied to answer the following questions. * What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a significant depreciation or a currency crisis? * What is a theoretically based empirical measure of an "excess" debt that increases the probability of or a debt crisis? * What is the interaction between an excess debt and a misaligned exchange rate? The theory is applied to evaluate the Euro exchange rate, the exchange rates of the transition economies, the sustainability of U.S. current account deficits, and derives warning signals of the Asian crises and debt crises in emerging markets.
Contains papers based on talks given at the first AMS-IMS-SIAM Joint Summer Research Conference on Mathematics of Finance held at Snowbird. This book includes such topics as modeling, estimation, optimization, control, and risk assessment and management. It is suitable for students interested in mathematical finance.
Stochastic Optimal Control (SOC)—a mathematical theory concerned with minimizing a cost (or maximizing a payout) pertaining to a controlled dynamic process under uncertainty—has proven incredibly helpful to understanding and predicting debt crises and evaluating proposed financial regulation and risk management. Stochastic Optimal Control and the U.S. Financial Debt Crisis analyzes SOC in relation to the 2008 U.S. financial crisis, and offers a detailed framework depicting why such a methodology is best suited for reducing financial risk and addressing key regulatory issues. Topics discussed include the inadequacies of the current approaches underlying financial regulations, the use of SOC to explain debt crises and superiority over existing approaches to regulation, and the domestic and international applications of SOC to financial crises. Principles in this book will appeal to economists, mathematicians, and researchers interested in the U.S. financial debt crisis and optimal risk management.
Including contributions from Jerome Stein and Guay Lim, this book explores debt and liquidity in finance. In three parts it covers developing country debt and currency crises, risk, and risk management in futures markets and liquidity.
In recent years nonlinearities have gained increasing importance in economic and econometric research, particularly after the financial crisis and the economic downturn after 2007. This book contains theoretical, computational and empirical papers that incorporate nonlinearities in econometric models and apply them to real economic problems. It intends to serve as an inspiration for researchers to take potential nonlinearities in account. Researchers should be aware of applying linear model-types spuriously to problems which include non-linear features. It is indispensable to use the correct model type in order to avoid biased recommendations for economic policy.
In a world dominated by uncertainty, modeling and understanding the optimal behavior of agents is of the utmost importance. Many problems in economics, finance, and actuarial science naturally require decision makers to undertake choices in stochastic environments. Examples include optimal individual consumption and retirement choices, optimal management of portfolios and risk, hedging, optimal timing issues in pricing American options, and investment decisions. Stochastic control theory provides the methods and results to tackle all such problems. This book is a collection of the papers published in the Special Issue "Applications of Stochastic Optimal Control to Economics and Finance", which appeared in the open access journal Risks in 2019. It contains seven peer-reviewed papers dealing with stochastic control models motivated by important questions in economics and finance. Each model is rigorously mathematically funded and treated, and the numerical methods are employed to derive the optimal solution. The topics of the book's chapters range from optimal public debt management to optimal reinsurance, real options in energy markets, and optimal portfolio choice in partial and complete information settings. From a mathematical point of view, techniques and arguments of dynamic programming theory, filtering theory, optimal stopping, one-dimensional diffusions and multi-dimensional jump processes are used.
Foreign Exchange Constraint and Developing Economies addresses the complex nature of foreign exchange constraint for macroeconomic and social development. The book collects expertise and perspectives from a diverse set of contributions. Using a combination of innovative theoretical and empirical approaches, the book suggests several analytical frameworks to help advance academic research and policy work on foreign exchange and sustainable development.
Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.
This book represents the third of three volumes offering a complete reinterpretation and restructuring of Keynesian macroeconomics and a detailed investigation of the disequilibrium adjustment processes characterizing the financial, the goods and the labour markets and their interaction. This book offers a full treatment of the interlinkages between the real and the financial markets, including an analysis of banking, credit, and endogenous money and asset markets. It remains critical of quite frequently used conventional macro models that have dropped the tradition of studying the macroeconomic feedback channels, well-known in the history of macroeconomics. Those feedback mechanisms are known to have the potential for instabilities with respect to real markets, price dynamics and financial markets. In this volume a particular emphasis is given to the financial-real interaction. The research in this book with its focus on Keynesian propagation mechanisms provides a unique alternative to the black-box shock-absorber approaches that dominate modern macroeconomics. The main conclusion of the work is that policy makers need to reconsider Keynesian ideas, but in the modern form in which they are expressed in this volume. Reconstructing Keynesian Macroeconomics will be of interest to students and researchers who want to look at alternatives to the mainstream macrodynamics that emerged from the Monetarist critique of Keynesianism. This book will also engage central bankers and macroeconomic policy makers.