Related papers: The dynamics of the leverage cycle
This paper develops a new model of business cycles. The model is economical in that it is solved with an aggregate demand-aggregate supply diagram, and the effects of shocks and policies are obtained by comparative statics. The model builds…
We propose a new framework for measuring connectedness among financial variables that arises due to heterogeneous frequency responses to shocks. To estimate connectedness in short-, medium-, and long-term financial cycles, we introduce a…
What is the dominating mechanism of the price dynamics in financial systems is of great interest to scientists. The problem whether and how volatilities affect the price movement draws much attention. Although many efforts have been made,…
Minimizing volatility and adjustment costs is of central importance in many economic environments, yet it is often complicated by evolving feasibility constraints. We study a decision maker who repeatedly selects an action from a…
A spring-block chain placed on a running conveyor belt is considered for modeling stylized facts observed in the dynamics of stock indexes. Individual stocks are modeled by the blocks, while the stock-stock correlations are introduced via…
We address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking…
Banks must optimize risky investments, dividend payouts, and capital structure under tight Basel III solvency and liquidity constraints, while costly equity issuance serves as a distress-recovery tool. We formulate this as a stochastic…
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate…
We contribute to the understanding of how systemic risk arises in a network of credit-interlinked agents. Motivated by empirical studies we formulate a network model which, despite its simplicity, depicts the nature of interbank markets…
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling…
Assessing the stability of economic systems is a fundamental research focus in economics, that has become increasingly interdisciplinary in the currently troubled economic situation. In particular, much attention has been devoted to the…
A common belief is that leveraged ETFs (LETFs) suffer long-term performance decay due to \emph{volatility drag}. We show that this view is incomplete: LETF performance depends fundamentally on return autocorrelation and return dynamics. In…
Econophysics and econometrics agree that there is a correlation between volume and volatility in a time series. Using empirical data and their distributions, we further investigate this correlation and discover new ways that volatility and…
We present a time-dependent Langevin description of dynamics of stock prices. Based on a simple sliding-window algorithm, the fluctuation of stock prices is discussed in the view of a time-dependent linear restoring force which is the…
We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm's capital structure, in order to enhance the value of her post career change indexed executive stock option contract with…
We study an agent-based stock market model with heterogeneous agents and friction. Our model is based on that of Foellmer-Schweizer(1993): The process of a stock price in a discrete-time framework is determined by temporary equilibria via…
Prize linked savings accounts provide a return in the form of randomly chosen accounts receiving large cash prizes, in lieu of a guaranteed and uniform interest rate. This model became legal for American national banks upon bipartisan…
Financial institutions have to allocate so-called "economic capital" in order to guarantee solvency to their clients and counter parties. Mathematically speaking, any methodology of allocating capital is a "risk measure", i.e. a function…
There are some statistical anomalies in the Chinese stock market, i.e., positive return skewness, anti-leverage effect (positive returns induce higher volatility than negative returns); and reverse volatility asymmetry (contemporaneous…
I sketch a program for a microeconomic theory of the main component of the business cycle as a recurring disequilibrium, driven by incompleteness of the financial market and by information asymmetries between borrowers and lenders. This…