Abstract

http://ssrn.com/abstract=1092397
 
 

References (16)



 
 

Citations (8)



 


 



A Tale of Two Debt Crises: A Stochastic Optimal Control Analysis


Jerome L. Stein


Brown University - Division of Applied Mathematics; CESifo (Center for Economic Studies and Ifo Institute)

February 2008

CESifo Working Paper Series No. 2220

Abstract:     
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 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 analysis is applied to the agricultural debt crisis of the 1980s and to the sub-prime mortgage crisis of 2007. A measure of excess debt is derived, and we show that it is an early warning signal of a crisis.

Number of Pages in PDF File: 28

Keywords: optimization, banking, stochastic optimal control, agriculture debt crisis, subprime mortgage crisis

JEL Classification: C61, D81, D91, D92

working papers series


Download This Paper

Date posted: February 12, 2008  

Suggested Citation

Stein, Jerome L., A Tale of Two Debt Crises: A Stochastic Optimal Control Analysis (February 2008). CESifo Working Paper Series No. 2220. Available at SSRN: http://ssrn.com/abstract=1092397

Contact Information

Jerome L. Stein (Contact Author)
Brown University - Division of Applied Mathematics ( email )
Providence, RI 02912
United States
401-863-2143 (Phone)
401-863-1355 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Feedback to SSRN


Paper statistics
Abstract Views: 1,398
Downloads: 446
Download Rank: 30,920
References:  16
Citations:  8

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 1.157 seconds