In times of distress when a country loses access to markets, there is evidence that credit default swap (CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country. However, it is not easy to discern the variables that determine the level of CDS spreads in...

A perennial question in international finance is to what extent stock returns are influenced by country-location, as opposed to industry-affiliation, factors. This paper develops a novel methodology to measure these effects, in which portfolios mimicking "pure" country and industry factors are...

This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet...

Emerging market financial crises are abrupt and dramatic, usually occurring after a period of high output growth, massive capital flows, and a boom in asset markets. This paper develops an equilibrium asset-pricing model with informational frictions in which vulnerability and the crisis itself...

A stochastic volatility model where volatility was driven solely by a latent variable called news was estimated for three stock indices. A Markov chain Monte Carlo algorithm was used for estimating Bayesian parameters and filtering volatilities. Volatility persistence being close to one was...

This note examines a numerical approach for computing American option prices in the lognormal jump–diffusion context. The approach uses the known transition density of the process to build a discrete-time, homogenous Markov chain to approximate the target jump–diffusion process. Numerical...

This paper shows how a well known class of rational expectations hypotheses using linear vector autoregressions (VAR:s) can be extended to allow for unobservable Markov switching. The regime shift model used falls into the general framework of Hamilton (1990), but differs to the centered model...

The problem addressed is that of a condensed steady-state solution for the Markov Chain (X(t), S(t)). The steady state marginal distribution of S(t) is known; we desire only the steady state marginal distribution of X(t). Such a case frequently arises when the supplementary random variable S(t)...

This paper proposes a moment-matching method for approximating vector autoregressions by finite-state Markov chains. The Markov chain is constructed by targeting the conditional moments of the underlying continuous process. The proposed method is more robust to the number of discrete values and...

This paper discusses how specification of probabilistic models for multistate duration data generated by individual choices should be justified on a priori theoretical grounds. Preferences are assumed represented by random utilities, where utilities are viewed as random also to the agent...