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Credit Default Swaps in General Equilibrium : Spillovers, Credit Spreads, and Endogenous Default

Darst, Matthew - 2016

safe rather than risky bonds is fundamentally altered. Issuing safe debt requires a transfer of profits from good states to … bad states to ensure full repayment. Alternatively, issuing risky bonds maximizes profits in good states at the expense of … issuing defaultable bonds even when underlying firm fundamentals remain unchanged. Hedging (Speculating on) credit risk lowers …

Persistent link: https://www.econbiz.de/10012992726

Financial Innovation, Collateral and Investment

Fostel, Ana - 2015

Financial innovations that change how promises are collateralized can affect investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates over-investment compared to Arrow Debreu. The introduction of CDS always leads to...

Persistent link: https://www.econbiz.de/10013026735

Efficiency and Distortions in a Production Economy with Heterogeneous Beliefs

Heyerdahl-Larsen, Christian - 2015

In a production economy, in which agents have heterogeneous beliefs and a social planner has incomplete knowledge about which beliefs are correct, we introduce the concept of Incomplete Knowledge (IK) efficiency. IK-inefficient allocations can be improved upon without taking a stand on which...

Persistent link: https://www.econbiz.de/10013028721

Credit Default Swaps in General Equilibrium : Endogenous Default and Credit Spread Spillovers

Darst, Matthew - 2018

This paper shows that credit default swaps (CDS) can affect the type of debt firms issue. Firms face a trade-off between investment scale and the cost of capital measured by the credit spread. Small-scale investment is safe, fully collateralized, but earns modest profits in all states....

Persistent link: https://www.econbiz.de/10012938470

Tranching, CDS and Asset Prices : How Financial Innovation Can Cause Bubbles and Crashes

Fostel, Ana; Geanakoplos, John - 2011

We show how the timing of financial innovation might have contributed to the mortgage boom and then to the bust of 2007-2009. We study the effect of leverage, tranching, securitization and CDS on asset prices in a general equilibrium model with collateral. We show why tranching and leverage tend...

Persistent link: https://www.econbiz.de/10014180051

Coherent Measures of Risk from a General Equilibrium Perspective

Herings, P. Jean-Jacques; Csóka, Péter; Koczy, Laszlo A. - 2011

Coherent measures of risk defined by the axioms of monotonicity, subadditivity, positive homogeneity, and translation invariance are recent tools in risk management to assess the amount of risk agents are exposed to. If they also satisfy law invariance and comonotonic additivity, then we get a...

Persistent link: https://www.econbiz.de/10014181761

Tranching, CDS and Asset Prices : How Financial Innovation Can Cause Bubbles and Crashes

Fostel, Ana - 2011

We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative...

Persistent link: https://www.econbiz.de/10013121404

Financial Innovation, Collateral and Investment

Fostel, Ana - 2013

We show that financial innovations that change the collateral capacity of assets in the economy can affect investment even in the absence of any shift in utilities, productivity, or asset payoffs. First we show that the ability to leverage an asset by selling non-contingent promises can generate...

Persistent link: https://www.econbiz.de/10013078367

A Kinetic Thermodynamics Approach to the Psychology of Fluctuations in Financial Markets

Caginalp, Gunduz - 2010

We derive a set of equations which are a simple model for investor behavior in a theoretical financial market. The model incorporates the emotional aspect of investor sentiment with memory of price history which decays exponentially in time. Within this model, the emotional reaction of the body...

Persistent link: https://www.econbiz.de/10013148838

Endogenous Habits and Equilibrium Asset Prices

Kraft, Holger; Meyer-Wehmann, André; Seifried, Frank Thomas - 2021

We study a two-agent equilibrium model with two goods where we interpret the agents as countries. We analyze the effect of an endogenous habit specification where each country benchmarks its consumption decision against the decision of the other country. We show that endogenous habits can...

Persistent link: https://www.econbiz.de/10013220218