Macrofinance: New Contingent Claims Framework for Valuation and Risk Analysis of Economies and its Real-world Applications
<-- Return to the list
Date: 11-15-2004
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Dr. Dale Gray, President of Macro Financial Risk Corporation and Co-director of Moody's-MfRisk Project
Location: 412 Shapiro CEPSR, Davis Auditorium
ABSTRACT
This new framework applies contingent claims approach to the sovereign (combined government and central bank) with linkages to contingent claim balance sheets of other sectors, such and banking and corporate sectors. It models risky debt, equity, guarantees and money as implicit put and call options. In contrast to macroeconomics, which gives only the income or flow accounts, this finance-based framework provides economy-wide balance sheets which accounts for risk and value transmission between sectors. Outputs include credit risk measures (spreads, risk neutral and physical default probabilities, distance-to-distress, etc.) and Greeks (deltas, gammas, vegas, etc.) of implicit options that are used as vulnerability indicators or guidelines for hedging positions in and across sectors. Results for specific countries, using the Moody's-MFRisk model, will be described. Potential applications to sovereign credit risk, trading (such as sovereign capital structure arbitrage) and design of macro risk mitigation and risk transmission programs will also be discussed.
The traditional macroeconomic flow-of-funds is shown to be a special case of this new framework where the volatility of assets of all sectors equals zero."
PRESENTATION