Sovereign bond risk premiums

Credit risk has become an important factor driving government bond returns. We therefore introduce an asset pricing model which exploits information contained in both forward interest rates and forward CDS spreads. Our empirical analysis covers euro-zone countries with German government bonds as credit risk-free assets. We construct a market factor from the first three principal components of the German forward curve as well as a common and a country-specific credit factor from the principal components of the forward CDS curves. We find that predictability of risk premiums of sovereign euro-zone bonds improves substantially if the market factor is augmented by a common and an orthogonal country-specific credit factor. While the common credit factor is significant for most countries in the sample, the country-specific factor is significant mainly for peripheral euro-zone countries. Finally, we find that during the current crisis period, market and credit risk premiums of government bonds are negative over long subintervals, a finding that we attribute to the presence of financial repression in euro-zone countries

A Dynamic Theory of Conjectural Variations

Series: Department of Economics Working Paper Serie

Cyclical Consumption Patterns and Rational Addiction

Series: Department of Economics Working Paper Serie

International Pollution Control: Cooperative Versus Noncooperative Strategies

Series: Department of Economics Working Paper Serie

Asset Price Dynamics in a Model of Investors Operating on Different Time Horizons

We present a dynamic asset pricing model based on a heterogenous class of traders. These traders are homogenous in the sense that they are fundamentalists who base their investment decisions on an exogenoulsy given fundamental value. They are heterogenous in the sense that each trader is working with a different frequency of the underlying price data. As a result we have a system of interacting investors who together influence the market price. We derive a system that characterizes out-of-equilibrium dynamics of prices in this market which is structurally equivalent to the Nosé-Hoover thermostat equation in non-equilibrium thermodynamics. We explore the time series properties of these prices and find that they exhibit fat tails of returns distributions, volatility clustering and power laws.Series: Working Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science

Sticky Particles and Stochastic Flows

Gaw\c{e}dzki and Horvai have studied a model for the motion of particles carried in a turbulent fluid and shown that in a limiting regime with low levels of viscosity and molecular diffusivity, pairs of particles exhibit the phenomena of stickiness when they meet. In this paper we characterise the motion of an arbitrary number of particles in a simplified version of their model

Redshifts and Killing Vectors

Courses in introductory special and general relativity have increasingly become part of the curriculum for upper-level undergraduate physics majors and master's degree candidates. One of the topics rarely discussed is symmetry, particularly in the theory of general relativity. The principal tool for its study is the Killing vector. We provide an elementary introduction to the concept of a Killing vector field, its properties, and as an example of its utility apply these ideas to the rigorous determination of gravitational and cosmological redshifts.Comment: 16 Latex pages, 6 postscript figures, submitted to Am. J. Phy