"Strategic Default Jump as Impulse Control in Continuous Time"

This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract design in a continuous-time environment with Markov income shocks and costly veri able information. It shows that an optimal contract has the form of a long-term debt contract that permits a debtor's strategic default and debt restructuring. The default is characterized by a recurrent, optimal impulse control beyond default. Numerical examples show that the equilibrium probability of the default is decreasing in the monitoring technology level when the default causes a big wealth loss.

Extracting market expectations from option prices: case studies in Japanese option markets

This paper focuses on the recently developing financial derivatives markets, and examines the usefulness of option prices as an information variable for monetary policy implementation. A set of option prices provides us with information on the whole probability distribution of the future values of underlying assets. Such information enables us to examine the development of market expectations. The paper estimates a time series of implied probability distributions from daily option prices on stock prices and long term government bond futures. The estimation is done for a sample of daily closing prices for the following three periods: (I) the period of a collapsing bubble in the stock market in 1989-90; (ii) the period of serious stock market slump in 1992-94; and (iii) the period of increasing anxiety in the market about a possible deflationary spiral in 1995.Monetary policy ; Options (Finance) ; Derivative securities ; Prices ; Japan

A Theoretical Analysis of Narrow Banking Proposals

The purpose of this paper is to examine narrow banking proposals. First, we survey the narrow banking proposals presented in the United States and Japan, and categorize them by means of two standards: (1) whether safe assets that a narrow bank is allowed to hold are limited to short-term assets, and (2) whether a narrow bank is allowed to engage in lending activity. Second, we examine the feasibility of each proposal for the purpose of achieving the stability of the financial system, making use of two theoretical models: Wallace (1996) and Kashyap, Rajan, and Stein (1998). Finally, we conclude that a desirable narrow bank is one that carries out both deposit-taking and lending activities, though restrictively, and is allowed to invest in short-term safe assets.

Term Structure of Interest Rates under Recursive Preferences in Continuous Time ( Revised in February 2008, subsequently published in "Asia-Pacific Financial Markets", Vol.15-3,4, 273-305. )

This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. In a representative-agent model with recursive utility and mean-reverting expectations on real output growth and inflation, this paper shows that, if (1) real short-term interest rates are high during economic booms and (2) the agent is comparatively risk-averse (less risk-averse) relative to time-separable utility, then a real yield curve slopes down (slopes up, respectively). Additionally, for the comparatively risk-averse agent, if (3) expected inflation is negatively correlated with the real output and its expected growth, then a nominal yield curve can slope up, regardless of the slope of the real yield curve.

Indirect reciprocity in three types of social dilemmas.

Indirect reciprocity is a key mechanism for the evolution of human cooperation. Previous studies explored indirect reciprocity in the so-called donation game, a special class of Prisoner\u27s Dilemma (PD) with unilateral decision making. A more general class of social dilemmas includes Snowdrift (SG), Stag Hunt (SH), and PD games, where two players perform actions simultaneously. In these simultaneous-move games, moral assessments need to be more complex; for example, how should we evaluate defection against an ill-reputed, but now cooperative, player? We examined indirect reciprocity in the three social dilemmas and identified twelve successful social norms for moral assessments. These successful norms have different principles in different dilemmas for suppressing cheaters. To suppress defectors, any defection against good players is prohibited in SG and PD, whereas defection against good players may be allowed in SH. To suppress unconditional cooperators, who help anyone and thereby indirectly contribute to jeopardizing indirect reciprocity, we found two mechanisms: indiscrimination between actions toward bad players (feasible in SG and PD) or punishment for cooperation with bad players (effective in any social dilemma). Moreover, we discovered that social norms that unfairly favor reciprocators enhance robustness of cooperation in SH, whereby reciprocators never lose their good reputation