Standard real business cycle models are often unable to replicate three empirical facts: positive output in response to good news, stochastic volatility of macro variables, and asymmetric business cycles. This paper proposes a unified basis for understanding these facts in a tractable dynamic...

This paper presents a dynamic portfolio credit model following the regulatory framework, using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system. The latent risk factors have three levels: global across the entire banking system,...

We study the effects that the Maastricht Treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from 10 European countries—seven from the Euro area and three outside of it. There are changes in the features of...

We develop a simple agent-based financial market model in which heterogeneous speculators apply technical and fundamental analysis to trade in two different stock markets. Speculators׳ strategy/market selections are repeated at each time step and depend on predisposition effects, herding...

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both...

Noisy rational expectations models, in which agents have dispersed private information and extract information from an endogenous asset price, are widely used in finance. However, these linear partial equilibrium models do not fit well in modern macroeconomics that is based on non-linear dynamic...

This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different policies affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce...

In the literature, econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component, with uncorrelated permanent and transitory shocks. Using data on realized individual incomes and individual expectations of future incomes from...

Two difficulties arise in the estimation of AB models: (i) the criterion function has no simple analytical expression, (ii) the aggregate properties of the model cannot be analytically understood. In this paper we show how to circumvent these difficulties and under which conditions ergodic...

Lévy processes have been successfully applied in the modeling of financial assets. Useful information such as implied volatility, skewness, and risk-preferences can be derived from market option prices. In this paper, we advocate using Esscher conjugate Lévy processes to estimate risk-neutral...