Abstract

http://ssrn.com/abstract=938963
 
 

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A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy


Zvi Bodie


Boston University - Department of Finance & Economics

Dale F. Gray


International Monetary Fund (IMF); MF Risk

Robert C. Merton


MIT Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

October 2006

NBER Working Paper No. w12637

Abstract:     
The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of national economic and financial systems. This paper proposes a new comprehensive approach to measure, analyze, and manage macroeconomic risk based on the theory and practice of modern contingent claims analysis (CCA). We illustrate how to use the CCA approach to model and measure sectoral and national risk exposures, and analyze policies to offset their potentially harmful effects. This new framework provides economic balance sheets for inter-linked sectors and a risk accounting framework for an economy. CCA provides a natural framework for analysis of mismatches between an entity's assets and liabilities, such as currency and maturity mismatches on balance sheets. Policies or actions that reduce these mismatches will help reduce risk and vulnerability. It also provides a new framework for sovereign capital structure analysis. It is useful for assessing vulnerability, policy analysis, risk management, investment analysis, and design of risk control strategies. Both public and private sector participants can benefit from pursuing ways to facilitate more efficient macro risk accounting, improve price and volatility discovery, and expand international risk intermediation activities.

Number of Pages in PDF File: 45

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Date posted: November 20, 2006  

Suggested Citation

Bodie, Zvi and Gray, Dale F. and Merton, Robert C., A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy (October 2006). NBER Working Paper No. w12637. Available at SSRN: http://ssrn.com/abstract=938963

Contact Information

Zvi Bodie
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Dale F. Gray
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
MF Risk
5921 Searl Terrace
Bethesda, MD 20816
Robert C. Merton (Contact Author)
MIT Sloan School of Management ( email )
77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6678 (Phone)
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References:  45
Citations:  16

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