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on Utility Models and Prospect Theory |
| By: | Jongwook Kim; Gabjin Oh |
| Abstract: | We propose a stochastic process driven by memory effect with novel distributions including both exponential and leptokurtic heavy-tailed distributions. A class of distribution is analytically derived from the continuum limit of the discrete binary process with the renormalized auto-correlation and the closed form moment generating function is obtained, thus the cumulants are calculated and shown to be convergent. The other class of distributions are numerically investigated. The concoction of the two stochastic processes of the different signs of memory under regime switching mechanism does incarnate power-law decay behavior, which strongly implies that memory is the alternative origin of heavy-tail. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1201.5690&r=upt |
| By: | Dario Caldara; Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez; Yao Wen |
| Abstract: | This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991) and stochastic volatility. Models with these two features have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences and stochastic volatility using four different approaches: second- and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that perturbations are competitive in terms of accuracy with Chebyshev polynomials and value function iteration while being several orders of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-04&r=upt |
| By: | Anita Mehta |
| Abstract: | We present a model of predatory traders interacting with each other in the presence of a central reserve (which dissipates their wealth through say, taxation), as well as inflation. This model is examined on a network for the purposes of correlating complexity of interactions with systemic risk. We suggest the use of selective networking to enhance the survival rates of arbitrarily chosen traders. Our conclusions show that networking with 'doomed' traders is the most risk-free scenario, and that if a trader is to network with peers, it is far better to do so with those who have less intrinsic wealth than himself to ensure individual, and perhaps systemic stability. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.1374&r=upt |
| By: | Zorana Grbac; Antonis Papapantoleon |
| Abstract: | We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0587&r=upt |