The optimal price of default

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)163-181
Journal / PublicationAnnals of Economics and Finance
Volume14
Issue number1
Publication statusPublished - May 2013

Abstract

With assets taken to be pools, rational expectations on their delivery rates are, as default is permissible in an economy and its penalty prescribed in terms of utility, indispensable to the existence of equilibrium. And the resulting equilibrium relies heavily on the prevailing penalty level. We propose, in this paper, a path-following algorithm for calculating the level of penalty that leads to a Pareto efficient equilibrium-Pareto efficient among the set of equilibria of the economies with distinct penalty levels. This algorithm brings off those rational expectations by identifying their upper and lower bounds iteratively until the discrepancies between them are admissible.

Research Area(s)

  • Default, Pareto efficiency, Path-following, Penalty, Rational expectation

Citation Format(s)

The optimal price of default. / Ma, Wei; Dang, Chuangyin.

In: Annals of Economics and Finance, Vol. 14, No. 1, 05.2013, p. 163-181.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review