Asset Prices, Booms and Recessions: Financial Economics from a Dynamic Perspective 2nd Edition

"Asset Prices, Booms and Recessions" is a book on Financial Economics from a dynamic perspective. It focuses on the dynamic interaction of financial markets and economic activity. The financial markets to be studied here encompasses the money and bond market, credit market, stock market and foreign exchange market. Economic activity is described by the activity of firms, banks, households, governments and countries. The book shows how economic activity affects asset prices and the financial market and how asset prices and financial market volatility feed back to economic activity. The focus in this book is on theories, dynamic models and empirical evidence. Empirical applications relate to episodes of financial instability and financial crises of the U.S., Latin American, Asian as well as Euro-area countries. The current version of the book has moved to a more extensive coverage of the topics in financial economics by updating the literature in the appropriate chapters. Moreover it gives a more extensive treatment of new and more advanced topics in financial economics such as international portfolio theory, multi-agent and evolutionary approaches, capital asset pricing beyond consumption-based models and dynamic portfolio decisions. Overall, the book presents material that researchers and practitioners in financial engineering need to know about economic dynamics and that economists, practitioners and policy makers need to know about the financial market. Table of Contents......Page 7 Introduction......Page 11 I: Money, Bonds and Economic Activity......Page 16 1.2 Some Basics......Page 17 1.3 Macroeconomic Theories of the Interest Rate......Page 18 1.4 Monetary Policy and Interest Rates......Page 21 1.5 Monetary Policy and Asset Prices......Page 22 1.6 Conclusions......Page 23 2.2 Definitions and Theories......Page 24 2.3 Empirical Tests on the Term Structure......Page 26 2.4 Conclusions......Page 30 II: The Credit Market and Economic Activity......Page 32 3.2 Perfect Capital Markets: Infinite Horizon and Two Period Models......Page 33 3.3 Imperfect Capital Markets: Some Basics......Page 41 3.4 Imperfect Capital Markets: Microtheory......Page 43 3.5 Imperfect Capital Markets: Macrotheory......Page 45 3.6 Imperfect Capital Markets: The Micro-Macro Link......Page 49 3.7 Conclusions......Page 54 4.2 Bankruptcy Risk and Economic Activity......Page 55 4.3 Liquidity and Economic Activity in a Threshold Model......Page 61 4.4 Estimations of Credit Risk and Sustainable Debt......Page 69 4.5 Conclusions......Page 82 III: The Stock Market and Economic Activity......Page 83 5.1 Introduction......Page 84 5.2 The Intertemporal Approach......Page 85 5.3 The Excess Volatility Theory......Page 87 5.4 Heterogeneous Agents Models......Page 89 5.5 The VAR Methodology......Page 90 5.6 Regime Change Models......Page 92 5.7 Conclusions......Page 93 6.1 Introduction......Page 94 6.2 A Dynamic Macro Model......Page 95 6.3 Empirical Results......Page 98 6.4 Conclusions......Page 100 7.2 Some Facts......Page 101 7.3 The Model......Page 103 7.4 Conclusions......Page 106 IV: Asset Pricing and Economic Activity......Page 107 8.2 Portfolio Theory and CAPM: Simple Form......Page 108 8.3 Portfolio Theory and CAPM: Generalizations......Page 113 8.4 Efficient Frontier for an Equity Portfolio......Page 115 8.5 Conclusions......Page 116 9.2 Present Value Approach......Page 117 9.3 Asset Pricing with a Stochastic Discount Factor......Page 118 9.4 Derivation of some Euler Equations......Page 121 9.5 Consumption, Risky Assets and the Euler Equation......Page 124 9.6 Conclusions......Page 128 10.1 Introduction......Page 130 10.3 The Baseline RBC Model......Page 132 10.4 Asset Market Restrictions......Page 134 10.5 Conclusions......Page 136 V: Foreign Exchange Market, Financial Instability and Economic Activity......Page 137 11.1 Introduction......Page 138 11.2 The Economy-Wide Balance Sheets......Page 139 11.3 Households' Holding of Financial Assets......Page 140 11.4 Shocks and Financial Market Reactions......Page 142 11.5 Conclusions......Page 143 12.1 Introduction......Page 144 12.2 Stylized Facts......Page 145 12.3 The Standard Exchange Rate Overshooting Model......Page 146 12.4 Exchange Rate Shocks and Balance Sheets......Page 150 12.5 Exchange Rate Shocks, Balance Sheets and Economic Contraction......Page 152 12.6 Exchange Rate Shocks, Credit Rationing and Economic Contractions......Page 158 12.7 Exchange Rate Shocks, Default Premia and Economic Contractions......Page 162 12.8 Conclusions......Page 166 13.2 Risk from Exchange Rate Volatility......Page 167 13.3 Portfolio Choice and Diversification of Risk......Page 170 13.4 International Bond Portfolio......Page 171 13.5 International Equity Portfolio......Page 173 13.7 Conclusions......Page 175 VI: Advanced Modeling of Asset Markets......Page 177 14.2 Heterogeneous Agent Models......Page 178 14.3 Evolutionary Models......Page 181 14.4 Conclusions......Page 184 15.2 Dynamic Habit Formation Models......Page 185 15.3 Moving Beyond Consumption Based Asset Pricing Models......Page 191 15.4 The Asset Pricing Model with Loss Aversion......Page 194 15.5 Conclusions......Page 198 16.2 Wealth Accumulation and Portfolio Decisions......Page 199 16.3 Discrete Time Dynamic Portfolio Choice under Log-Normality......Page 202 16.4 Continuous Time Deterministic Dynamic Portfolio Choice......Page 205 16.5 Continuous Time Stochastic Dynamic Portfolio Choice......Page 211 16.6 Conclusions......Page 218 17. Some Policy Conclusions......Page 219 Bibliography......Page 234 E......Page 247 R......Page 248 Z......Page 249 The book studies the interaction of the financial market, economic activity and the macroeconomy from a dynamic perspective. The financial market to be studied here encompasses the money and bond market, credit market, stock market and foreign exchange market. Economic activity is described by the activity of firms, banks, households, governments and countries. The book shows how economic activity affects asset prices and the financial market and how asset prices and financial market volatility feed back to economic activity. The focus in this book is on theories, dynamic models and empirical evidence. Empirical applications relate to episodes of financial instability and financial crises of the U.S., Latin American, Asian as well as Euro-area countries. The book is not only useful for researchers and practitioners in the field of financial engineering, but is also very useful for researchers and practitioners in economics