A tale of two debt crises: a stochastic optimal control analysis

Artikel

Creditors, banks and bank regulators should evaluate whether a borrower is likely to default. I apply several techniques in the extensive mathematical literature of stochastic optimal control/dynamic programming to derive an optimal debt in an environment where there are risks on both the asset and liabilities sides. The vulnerability of the borrowing firm to shocks from either the return to capital, the interest rate or capital gain, increases in proportion to the difference between the Actual and Optimal debt ratio, called the excess debt. As the debt ratio exceeds the optimum, default becomes ever more likely. This paper is 'A Tale of Two Crises' because the same analysis is applied to the agricultural debt crisis of the 1980s and to the subprime mortgage crisis of 2007. A measure of excess debt is derived, and we show that it is an early warning signal of a crisis in both cases

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Journal: Economics: The Open-Access, Open-Assessment E-Journal ; ISSN: 1864-6042 ; Volume: 4 ; Year: 2010 ; Issue: 2010-3 ; Pages: 1-24 ; Kiel: Kiel Institute for the World Economy (IfW)

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Criteria for Decision-Making under Risk and Uncertainty ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
• Thema: Optimization ; banking ; stochastic optimal control ; agriculture debt crisis ; subprime mortgage crisis ; Kreditrisiko ; Messung ; Dynamische Optimierung ; Stochastischer Prozess ; Kontrolltheorie ; Vergleich ; Finanzmarktkrise ; USA

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Stein, Jerome L.
• Ereignis: Veröffentlichung
• (wer): Kiel Institute for the World Economy (IfW)
• (wo): Kiel
• (wann): 2010

Weitere Informationen

• DOI: doi:10.5018/economics-ejournal.ja.2010-3
• Handle: http://hdl.handle.net/10419/29631
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ