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"Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment,...
Persistent link: https://www.econbiz.de/10012466820
This article explains how debt markets have malfunctioned in the crisis, with deleterious consequences for the real economy. I begin with a quick overview of debt markets. I then discuss three areas that are crucial in all debt markets decisions: risk capital and risk aversion, repo financing...
Persistent link: https://www.econbiz.de/10012463107
I describe two amplifications mechanisms that operate during liquidity crises and discuss the scope for central bank policies during crises as well as preventive policies in advance of crises. The first mechanism works through asset prices and balance sheets. A negative shock to the balance...
Persistent link: https://www.econbiz.de/10012463609
This paper proposes that idiosyncratic firm-level fluctuations can explain an important part of aggregate shocks, and provide a microfoundation for aggregate productivity shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm...
Persistent link: https://www.econbiz.de/10012463365
A power law is the form taken by a large number of surprising empirical regularities in economics and finance. This article surveys well-documented empirical power laws concerning income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and...
Persistent link: https://www.econbiz.de/10012464348
This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset's fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and...
Persistent link: https://www.econbiz.de/10012464923
This methodological paper presents a class of stochastic processes with appealing properties for theoretical or empirical work in finance and macroeconomics, the "linearity-generating" class. Its key property is that it yields simple exact closed-form expressions for stocks and bonds, with an...
Persistent link: https://www.econbiz.de/10012465219
Inattention is a central, unifying theme for much of behavioral economics. It permeates such disparate fields as microeconomics, macroeconomics, finance, public economics, and industrial organization. It enables us to think in a rather consistent way about behavioral biases, speculate about...
Persistent link: https://www.econbiz.de/10012453617
A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly...
Persistent link: https://www.econbiz.de/10012455726
This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or "sparse," model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of...
Persistent link: https://www.econbiz.de/10012456824