This discussion paper resulted in a publication in <A HREF="http://link.springer.com/article/10.1007%2Fs10645-012-9188-7">'De Economist'</A>, 2012, 160(3), 219-236.</A> When debt levels approach critical levels, tax payers may revolt against the associated debtservice burden. Funding problems may arise in capital markets when lenders anticipate such revolts and refuse to...</a>

This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the...

Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavytail feature...

We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to <I>common</I> (and not firm-specific) news and arises predominantly in response to <I>positive</I> (instead of...</i></i>

This discussion paper led to a publication in the <I>Journal of Economic Dynamics and Control</I>. Volume 31(6), pp. 1938-1970.<P> We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all...</p></i>

This paper surveys work on dynamic heterogeneous agent models (HAMs) in economics and finance. Emphasis is given to simple models that, at least to some extent, are tractable by analytic methods in combination with computational tools. Most of these models are behavioral models with boundedly...

We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships. Our estimates for the G-5 countries suggest...

This discussion paper led to a chapter in: (S.N. Durlauf & L.E. Blume (Eds.))<I>The New Palgrave Dictionary of Economics</I> 2nd ed. Vol.4, pp. 402-406. Basingstoke: Palgrave Macmillan, 2008.<P> Interacting agents in finance represent a behavioral, agent-based approach in which financial markets are...</p></i>

U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. marketand, potentially, in both markets simultaneously. We use a state space model to study 24-hour price discovery. As opposed to thestandard "variance ratio'' approach,...

These notes review two simple heterogeneous agent models in economics and finance. The first is a cobweb model with rational versus naive agents introduced in Brock and Hommes (1997). The second is an asset pricing model with fundamentalists versus technical traders introduced in Brock and...