We study the gap between the state pension provided by the Italian pension system pre-Dini reform and post-Dini reform. The goal is to fill the gap between the old and the new pension by joining a defined contribution pension scheme and adopting an optimal investment strategy that is...

We present the Forest of Stochastic Trees (FOST) method for pricing multiple exercise options by simulation. The proposed method uses stochastic trees in place of binomial trees in the Forest of Trees algorithm originally proposed to value swing options, hence extending that method to allow for...

The recent financial crises, especially the debt crisis in Asia, have led to questions su ch as: what are their causes, what is an excessive debt and how vulnerable is an economy to external shocks? We develop an economic model of international finance and debt based upon two sources of...

We provide benchmarks to evaluate what is an optimal foreign debt and a maximal foreign debt (debt-max), when risk is explicitly considered. When the actual debt exceeds debt-max, then the economy will default when a bad shock occurs. This paper is an application of the stochastic optimal...

We use stochastic optimal control-dynamic programming (DP) to derive the optimal foreign debt/net worth, consumption/net worth, current account/net worth, and endogenous growth rate in an open economy. Unlike the literature that uses an Intertemporal Budget Constraint (IBC) or the Maximum...

What is an optimal or a sustainable external debt - for a country, region or sector? How should one monitor and evaluate debt to preclude a crisis? We use stochastic optimal control/dynamic programming to derive an optimal debt. The deviation of the actual from the optimal will serve as a...

In July 1997, the economies of East Asia became embroiled in one of the worst financial crises of the postwar period. Yet, prior to the crisis, these economies were seen as models of economic growth experiencing sustained growth rates that exceeded those earlier thought unattainable. Why did the...

The focus is upon equilibrium real exchange rates, optimal external debt and their interaction, in a world where both the return on investment and the real rate of interest are stochastic variables. These theoretically based measures are applied empirically to answer the following questions:...

Banks 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...

A healthy financial system encourages the efficient allocation of capital and risk. The collapse of the house price bubble led to the financial crisis that started in 2007. There is a large empirical literature concerning the relation between asset price bubbles and financial crises. I evaluate...