Macrofinancial Risk Analysis

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John Wiley & Sons, Apr 30, 2008 - Business & Economics - 362 pages
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Macrofinancial risk analysis


Dale Gray and Samuel Malone


Macrofinancial Risk Analysis provides a new and powerful framework with which policymakers and investors can analyze risk and vulnerability in economies, both emerging market and industrial. Using modern risk management and financial engineering techniques applied to the macroeconomy, an economic value can be placed on the risks posed by inter-linkages between sectors, the risk of default of different sectors on their outstanding debt obligations quantified, and the value ex-ante of guarantees to private sector entities by the government calculated. This book guides the reader through the basic macroeconomic and financial models necessary to understand the framework, the core analytical tools, and more advanced contributions that will be of interest to researchers. This unique synthesis of ideas from finance and macroeconomics offers several original contributions to the theory of financial crises, as well as a range of new policy options for governments interested in achieving a better tradeoff between economic growth and macro risk.
 

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Contents

1 Introduction
1
PART I OVERVIEW OF FINANCE MACROECONOMICS AND RISK CONCEPTS
7
2 An Overview of Macroeconomics and Why the Theory of Asset Pricing and Contingent Claims Should Shape its Future
9
3 Macroeconomic Models
29
4 Stochastic Processes Asset Pricing and Option Pricing
43
5 Balance Sheets Implicit Options and Contingent Claims Analysis
59
6 Further Extensions and Applications of Contingent Claims Analysis
73
PART II THE MACROFINANCE MODELING FRAMEWORK
91
13 Macrofinancial Modeling Framework Relationship to Accounting Balance Sheets and the Flow of Funds
187
14 Macrofinancial Risk Framework Linked to Macroeconomic Models
203
PART IV CRISIS AND DISTRESS IN ECONOMIES
219
15 Macroeconomic Models vs Crisis Models Why Nonlinearity Matters
221
16 Sensitivity Analysis Destabilization Mechanisms and Financial Crises
231
17 The Case of Thailand 19961999
247
18 The Brazil Crisis of 20022003
259
PART V MACROFINANCIAL MODEL APPLICATIONS AND ANALYTICAL ISSUES
267

7 The Macrofinance Modeling Framework Interlinked Sector Balance Sheets
93
8 The Macrofinance Modeling Framework A Closer Look at the Sovereign CCA Balance Sheet
109
9 The Macrofinance Modeling Framework Linking Interest Rate Models in Finance and Macroeconomics
129
10 Macrofinance Modeling Framework Financial Sector Risk and Stability Analysis
139
11 Macrofinancial Modeling Framework Extensions to Different Exchange Rate Regimes
163
PART III LINKING MACROFINANCIAL AND MACROECONOMIC FRAMEWORKS
175
12 Sovereign Reserve Debt and Wealth Management from a Macrofinancial Risk Perspective
177
19 International Shocks Risk Transmission and Crisis Prevention Backdrop for Understanding the 200708 Global Financial Credit Turmoil
269
20 Macro Risk Management Ways to Mitigate Control and Transfer Risk in the Economy
285
21 Integrated Framework for Corporate and Sovereign Relative Value and Capital Structure Arbitrage
297
22 Conclusions and New Directions for Macrofinance
303
Appendix A MundellFleming with a Risk Premium
311
Index
323
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About the author (2008)

Dr. DALE GRAY is the Senior Risk Expert in the Monetary and Capital Markets Department of the International Monetary Fund (IMF). He is founder and President of Macro Financial Risk, Inc. (Mf Risk) a pioneer in the application of risk management tools to economies (board members include Robert Merton and Zvi Bodie). He has worked for investment banks, hedge funds, Moody’s Investors Service, IMF, World Bank, IFC as well as advising governments on macro risk analysis, management of sovereign wealth funds, and the design of risk mitigation strategies. He has worked on over thirty countries, is a frequent lecturer with numerous publications. He has a Ph.D. from MIT, MS from Stanford and is a certified Financial Risk Manager.

Dr. SAMUEL W. MALONE is a professor of finance at the IESA, a business school in Caracas, and director of ProAlea, Inc., a risk and strategy consultancy based in Latin America.  He holds a doctorate in economics from the University of Oxford, UK, and undergraduate degrees in mathematics and economics from Duke University, where he graduated Phi Beta Kappa with summa cum laude Latin honors. Elected to attend Oxford as a Rhodes Scholar representing the United States, Malone is also a four-time winner of the international Mathematical Contest in Modeling, an intensive problem-solving competition in which participants devise and write up solutions to real-world problems chosen by experts in government and industry. Author of several articles in applied mathematics and economics, he has consulted for the International Monetary Fund and the Inter-American Development Bank in Washington, DC.

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