Statistical Methods in Finance 2016

Dec 18 - 22, 2016


Financial time series analyses: Near extreme events, correlations and comovements

by Gopal Basak

We propose a dynamic model of foreign capital inflow with two country groups - one borrowing and another lending. Instead of a competitive market for the international loan market we assume market power of the agents, in particular the lenders which is the source of strategic interaction in the model. Equilibrium is obtained via multi period optimization of joint pay-off function in a Nash cooperative framework where shock of one period spills over in the future periods. The model further captures the impact of productivity shocks in the borrowing country due to change in risk perception in terms of the characteristics and the severity of the risk, as well as the risk tolerance of the developed country, all of which are situation specific. The possibility of contagion and its extent are explored arising from random shock in a single country even when the shocks across countries are independent.