During the recent European sovereign debt crisis, returns on EMU government bond portfoli-os experienced substantial volatility clustering, leptokurtosis and skewed returns as well as correlation spikes. Asset managers invested in European government bonds had to derive new hedging strategies to...

This paper presents a procedure to determine policy feedback rules in dynamic stochastic general equilibrium (DSGE) models. We illustrate our approach with fiscal feedback rules for tax instruments in a standard medium-scale DSGE model. First, we approximate the optimal dynamic behavior of the...

The single auction equilibrium of Kyle's (1985) is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most...

We report experimental results for a twice-played prisoners' dilemma in which the players can choose the allocation of the stakes across the two periods. Our point of departure is the assumption that some (but not all) people are principled to “do the right thing,” or cooperate, as long as...

The 2008 financial crisis did not precipitate global retaliatory trade intervention, in seeming contrast to the Great Depression in 1930s. This paper discusses the influence of model structure in optimal tariff (OT) calculations in explaining this puzzle. We emphasize how earlier literature...

High bank leverage is commonly considered a major threat to financial stability. We build a structural credit model to calculate the optimal leverage for a bank that provides asset backed loans, such as corporate loans and mortgages. The bank's assets are loans, which means that the bank's...

We propose a theoretical framework of exchange rate behavior where investors focus on a subset of economic fundamentals. We find that any adjustment in the set of predictors used by investors leads to changes in the relation between the exchange rate and fundamentals. We test the validity of...

No consensus has emerged on how to deal with overnight returns when calculating realized volatility in markets where trading does not take place 24 hours a day. This paper explores several common volatility applications, investigating how the chosen treatment of overnight returns affects the...

To estimate causal effects from observational data, an applied researcher must impose beliefs. The instrumental variables exclusion restriction, for example, represents the belief that the instrument has no direct effect on the outcome of interest. Yet beliefs about instrument validity do not...

A number of single ARCH model-based methods of predicting volatility are compared to Degiannakis and Xekalaki's (2005) poly-model standardized prediction error criterion (SPEC) algorithm method in terms of profits from trading actual options of the S&P500 index returns. The results show that...