Stochastic Optimal Control and the U.S. Financial Debt Crisis

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Stochastic Optimal Control and the U.S. Financial Debt Crisis; Contents; List of Figures; List of Tables; Chapter 1: Introduction; 1.1 The Subject and Contributions of This Book; References; Chapter 2: The Fed, IMF and Disregarded Warnings; 2.1 Greenspan´s Theme and the Fed; 2.1.1 The Jackson Hole Consensus; 2.1.2 Desirable Leverage, Capital Requirements; 2.1.3 Market Anticipations of the Housing: Mortgage Debt Crisis; 2.1.4 The Disregarded Warnings; 2.1.5 The Controversy Over Regulation and Deregulation; 2.1.6 The Failures of International Monetary Fund Surveillance; 2.2 Conclusions

ReferencesChapter 3: Failure of the Quants; 3.1 Theme of This Chapter; 3.2 Leveraging; 3.2.1 The Incredible Leverage of Atlas Capital Funding; 3.3 Structure of Derivatives Market, Rating Agencies and Pricing of Derivatives; 3.3.1 Pricing CDOs; 3.4 Major Premise of Economics/Finance: No Arbitrage Principle (NAP); 3.4.1 CAPM Model; 3.4.2 BSM Model; 3.4.3 The Efficient Market Hypothesis (EMH); 3.4.4 The Quants and the Models; 3.4.5 The CAPM; 3.4.6 Credit Default Swaps, EMH and the House Price Index; 3.5 When Has the Drift Changed?; 3.6 Conclusion: Errors of the Quants; References

Chapter 4: Philosophy of Stochastic Optimal Control Analysis (SOC)4.1 Why Use Stochastic Optimal Control?; 4.2 Research Strategy; 4.3 Modeling the Uncertainty, the Stochastic Variables; 4.4 Criterion Function; 4.5 Methods of Solution of Stochastic Optimal Control Problem; 4.6 Loss of Expected Growth from Misspecification; 4.7 Insurance; 4.7.1 Cramér-Lundberg; 4.7.2 Ruin Analysis; 4.7.3 The Stochastic Optimal Control Approach to Insurance; 4.8 The Endogenous Changing Distributions; 4.9Mathematical Appendix; Model I; Model II; References

Chapter 5: Application of Stochastic Optimal Control (SOC) to the US Financial Debt Crisis5.1 Introduction; 5.2 The Importance of the Housing/Mortgage Sector to the Financial Sector; 5.3 Characteristics of the Mortgage Market; 5.4 The Stochastic Optimal Control Analysis; 5.4.1 Model I; 5.4.2 Model II; 5.5 Interpretation of Optimal Debt Ratio; 5.6 Empirical Measures of an Upper Bound of the Optimal and Actual Debt Ratio; 5.7 Early Warning Signals of the Crisis; 5.8 The Market Delusion; 5.9 The Shadow Banking System: Leverage and Financial Linkages; 5.9.1 Summary; References

Chapter 6: AIG in the Crisis6.1 Introduction; 6.2 AIG; 6.3 The Economics and Actuarial Literature; 6.4 Stochastic Optimal Control (SOC) Approach to Optimal Liabilities of a Large Insurer; 6.5 Mathematical Analysis; 6.6 Solution for the Optimum Liability Ratio in General Model; 6.7 Model Uncertainty and Optimal Liability Ratio; 6.8 Early Warning Signals; 6.9 An Evaluation of the Bailout; 6.9.1 Government´s Justification for Rescue; 6.9.2 Panel´s Analysis of Options Available to the Government and Decisions; 6.10 Conclusions: Lessons to be Learned; References; Chapter 7: Crisis of the 1980s

7.1 Introduction

10.1007/978-1-4614-3079-7 [DOI]

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