Empirical Analysis of Credit Risk Regime Switching and Temporal Conditional Default Correlation in Credit Default Swap Valuation: The Market liquidity effect

In this paper, we extend the debate concerning Credit Default Swap valuation to include time varying correlation and co-variances. Traditional multi-variate techniques treat the correlations between covariates as constant over time; however, this view is not supported by the data. Secondly, since financial data does not follow a normal distribution because of its heavy tails, modeling the data using a Generalized Linear model (GLM) incorporating copulas emerge as a more robust technique over traditional approaches. This paper also includes an empirical analysis of the regime switching dynamics of credit risk in the presence of liquidity by following the general practice of assuming that credit and market risk follow a Markov process. The study was based on Credit Default Swap data obtained from Bloomberg that spanned the period January 1st 2004 to August 08th 2006. The empirical examination of the regime switching tendencies provided quantitative support to the anecdotal view that liquidity decreases as credit quality deteriorates. The analysis also examined the joint probability distribution of the credit risk determinants across credit quality through the use of a copula function which disaggregates the behavior embedded in the marginal gamma distributions, so as to isolate the level of dependence which is captured in the copula function. The results suggest that the time varying joint correlation matrix performed far superior as compared to the constant correlation matrix; the centerpiece of linear regression models.

Lying, Integrity, and Cooperation

While talk is cheap to some, it is expensive to others for whom moral considerations come into play. We employ a simple two-stage modified prisoner's dilemma game where integrity is endowed on a continuum to analyze when agents will lie in random economic interactions. If there is sufficient integrity in the population, all agents make a promise in the first stage to cooperate in the second. Some agents always lie, some always tell the truth, and some behave conditionally. Enhanced cooperation is a byproduct of integrity.

Cooperation & Competition Between Navigation Systems in the Rat Brain: The Role of the Hippocampus and Striatum During a Dissociative Maze Task

While many tend to think of memory systems in the brain as a single process, in reality several experiments have supported multiple dissociations of different forms of learning, such as spatial learning and response learning. In both humans and rats, the hippocampus has long been shown to be specialized in the storage of spatial and contextual memory whereas the striatum is associated with motor responses and habitual behaviors. Previous studies have examined how damage to hippocampus or striatum has affected the acquisition of either a spatial or response navigation task. However even in a very familiar environment organisms must continuously switch between place and response strategies depending upon circumstances. The current research investigates how these two brain systems interact under normal conditions to produce navigational behavior. Rats were tested using a task developed by Jacobson and colleagues (2006) in which the two types of navigation could be controlled and studied simultaneously. Rats were trained to solve a plus maze using both a spatial and a response strategy. A cue (flashing light) was employed to indicate the correct strategy on a given trial. When no light was present, the animals were rewarded for making a 90º right turn (motor response). When the light was on, the animals were rewarded for going to a specific goal location (place strategy). After learning the task, animals had a sham surgery or dorsal striatum or hippocampus damaged. In order to investigate the individual role of each brain system and evaluate whether these brain regions compete or cooperate for control over strategy, we utilized a within-animal comparisons. The configuration of the maze allowed for the comparison of behavior in individual animals before and after specific brain areas were damaged. Animals with hippocampal lesions showed selective deficits on place trials after surgery and learned the reversal of the motor response more rapidly than striatal lesioned or sham rats. Unlike previous findings regarding maze learning, animals with striatal lesions showed deficits in both place and response trials and had difficulty learning the reversal of motor response. Therefore, the effects of lesions on the ability to switch back and forth between strategies were more complex than previously suggested. This work may reveal important new insight on the integration of hippocampal and striatal learning systems, and facilitate a better understanding of the brain dynamics underlying similar navigational processes in humans.

Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility

This paper empirically assesses whether monetary policy affects real economic activity through its affect on the aggregate supply side of the macroeconomy. Analysts typically argue that monetary policy either does not affect the real economy, the classical dichotomy, or only affects the real economy in the short run through aggregate demand new Keynesian or new classical theories. Real business cycle theorists try to explain the business cycle with supply-side productivity shocks. We provide some preliminary evidence about how monetary policy affects the aggregate supply side of the macroeconomy through its affect on total factor productivity, an important measure of supply-side performance. The results show that monetary policy exerts a positive and statistically significant effect on the supply-side of the macroeconomy. Moreover, the findings buttress the importance of countercyclical monetary policy as well as support the adoption of an optimal money supply rule. Our results also prove consistent with the effective role of monetary policy in the Great Moderation as well as the more recent rise in productivity growth.