[PDF] Stochastic Optimal Control Approach To International Finance Foreign Debt eBook

Author : Jerome L. Stein
Publisher : Oxford University Press, USA
Page : 305 pages
File Size : 19,90 MB
Release : 2006-04-06
Category : Business & Economics
ISBN : 0199280576

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This book focuses on the interaction between equilibrium real exchange rates, optimal external debt, endogenous optimal growth and current account balances, in a world of uncertainty. The theoretical parts result from interdisciplinary research between economics and applied mathematics. From the economic theory and the mathematics of stochastic optimal control the author derives benchmarks for the optimal debt and equilibrium real exchange rate in an environment where both thereturn on capital and the real rate of interest are stochastic variables. The theoretically derived equilibrium real exchange rate - the "natural real exchange rate" NATREX - is where the real exchange rate is heading. These benchmarks are applied to answer the following questions.* What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a significant depreciation or a currency crisis?* What is a theoretically based empirical measure of an "excess" debt that increases the probability of or a debt crisis?* What is the interaction between an excess debt and a misaligned exchange rate?The theory is applied to evaluate the Euro exchange rate, the exchange rates of the transition economies, the sustainability of U.S. current account deficits, and derives warning signals of the Asian crises and debt crises in emerging markets.

Author : Jerome L. Stein
Publisher : Springer Science & Business Media
Page : 167 pages
File Size : 32,43 MB
Release : 2012-03-30
Category : Business & Economics
ISBN : 146143078X

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Stochastic Optimal Control (SOC)—a mathematical theory concerned with minimizing a cost (or maximizing a payout) pertaining to a controlled dynamic process under uncertainty—has proven incredibly helpful to understanding and predicting debt crises and evaluating proposed financial regulation and risk management. Stochastic Optimal Control and the U.S. Financial Debt Crisis analyzes SOC in relation to the 2008 U.S. financial crisis, and offers a detailed framework depicting why such a methodology is best suited for reducing financial risk and addressing key regulatory issues. Topics discussed include the inadequacies of the current approaches underlying financial regulations, the use of SOC to explain debt crises and superiority over existing approaches to regulation, and the domestic and international applications of SOC to financial crises. Principles in this book will appeal to economists, mathematicians, and researchers interested in the U.S. financial debt crisis and optimal risk management.

Author : Salvatore Federico
Publisher :
Page : 206 pages
File Size : 28,36 MB
Release : 2020-06-23
Category :
ISBN : 9783039360581

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In a world dominated by uncertainty, modeling and understanding the optimal behavior of agents is of the utmost importance. Many problems in economics, finance, and actuarial science naturally require decision makers to undertake choices in stochastic environments. Examples include optimal individual consumption and retirement choices, optimal management of portfolios and risk, hedging, optimal timing issues in pricing American options, and investment decisions. Stochastic control theory provides the methods and results to tackle all such problems. This book is a collection of the papers published in the Special Issue "Applications of Stochastic Optimal Control to Economics and Finance", which appeared in the open access journal Risks in 2019. It contains seven peer-reviewed papers dealing with stochastic control models motivated by important questions in economics and finance. Each model is rigorously mathematically funded and treated, and the numerical methods are employed to derive the optimal solution. The topics of the book's chapters range from optimal public debt management to optimal reinsurance, real options in energy markets, and optimal portfolio choice in partial and complete information settings. From a mathematical point of view, techniques and arguments of dynamic programming theory, filtering theory, optimal stopping, one-dimensional diffusions and multi-dimensional jump processes are used.

Author : Jerome L. Stein
Publisher : OUP Oxford
Page : 304 pages
File Size : 42,48 MB
Release : 2006-04-06
Category : Business & Economics
ISBN : 0191535710

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This book focuses on the interaction between equilibrium real exchange rates, optimal external debt, endogenous optimal growth and current account balances, in a world of uncertainty. The theoretical parts result from interdisciplinary research between economics and applied mathematics. From the economic theory and the mathematics of stochastic optimal control the author derives benchmarks for the optimal debt and equilibrium real exchange rate in an environment where both the return on capital and the real rate of interest are stochastic variables. The theoretically derived equilibrium real exchange rate - the "natural real exchange rate" NATREX - is where the real exchange rate is heading. These benchmarks are applied to answer the following questions. * What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a significant depreciation or a currency crisis? * What is a theoretically based empirical measure of an "excess" debt that increases the probability of or a debt crisis? * What is the interaction between an excess debt and a misaligned exchange rate? The theory is applied to evaluate the Euro exchange rate, the exchange rates of the transition economies, the sustainability of U.S. current account deficits, and derives warning signals of the Asian crises and debt crises in emerging markets.

Author : Wendell H. Fleming
Publisher :
Page : 0 pages
File Size : 50,70 MB
Release : 2000
Category :
ISBN :

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Data on the credit rating of bonds issued in the first half of the 1990s suggest that investors in emerging market securities paid little attention to credit risk, or that they were comfortable with the high level of credit risk that they were incurring. The literature in international finance concerning inter-temporal optimization in discrete time makes assumptions that imply certainty equivalence. Example: If the expected productivity of capital is a constant that exceeds the interest rate, investment and debt are maximal. There is a need for a "paradigm shift" that involves greater analytic emphasis on the risks associated with the reliance on short-term debt for otherwise creditworthy borrowers. Using stochastic optimal control techniques, we develop a paradigm for risk management, with the constraint that there be no default on short- term foreign currency denominated debt. We solve for the constrained optimal investment and external debt in both a finite horizon discrete time and an infinite horizon continuous time context. We thereby derive benchmarks to compare the actual with the constrained optimal debt. The probability of default/rescheduling increases when our constrained optimality conditions are violated. The main reason for a deviation between the actual debt and the optimal debt is the moral hazard that has been stressed in the literature on crises. The government provides implicit insurance that induces firms to ignore/underemphasize risk. Bubbles tend to occur. However, when the shocks occur, the government cannot fulfill its commitments.

Author : Jerome L. Stein
Publisher :
Page : 0 pages
File Size : 27,91 MB
Release : 2006
Category :
ISBN :

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The International Monetary Fund, the World Bank and the bond rating agencies did not anticipate the crises in Asia 1997-98 and in Argentina 2001. With this statement in mind, we consider some multi-stage inter-temporal stochastic optimisation models in international finance that imply theoretically founded and empirically measurable Early Warning Signals. The mathematical technique is dynamic programming/stochastic optimal control (DP/SOC). The variables of interest are the optimal foreign debt, consumption, capital and the growth rate of GDP. They are used as benchmarks of economic performance. By comparing the actual debt to the optimal debt we derive a measure of the sustainability of the debt and vulnerability to default problems. The two sources of uncertainty - the productivity of capital and the real interest rate on the foreign debt - are modeled as stochastic processes. Specific applications of the DP/SOC techniques are given for country defaults in Asia and Latin America, and the US current account deficits.