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This paper examines if (and how) continuous-time trading renders dynamically-complete a financial market in which the underlying risk process is a Brownian motion and the securities pay dividends that are proportional to geometric Brownian motions. A sufficient condition, that the instantaneous...
Persistent link: https://www.econbiz.de/10011185963
We combine general equilibrium theory and théorie générale of stochastic processes to derive structural results about equilibrium state prices.
Persistent link: https://www.econbiz.de/10010272583
We combine general equilibrium theory and théorie générale of stochastic processes to derive structural results about equilibrium state prices. -- General equilibrium ; Continuous-time finance ; Théorie générale of stochastic processes ; Asset pricing ; State prices
Persistent link: https://www.econbiz.de/10003729456
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/10003435485
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
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
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
This paper highlights two new effects of credit default swap markets (CDS) in a general equilibrium setting. First, when firms' cash flows are correlated, CDSs impact the cost of capital{credit spreads{and investment for all firms, even those that are not CDS reference entities. Second, when...
Persistent link: https://www.econbiz.de/10012992726
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
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