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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/30702
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| Title: | | A critique of the literature on the US financial debt crisis  |
| Authors: | | Stein, Jerome L. |
| Issue Date: | | 2010 |
| Series/Report no.: | | CESifo working paper 2924 |
| Abstract: | | A healthy financial system encourages the efficient allocation of capital and risk. The collapse of the house price bubble led to the financial crisis that started in 2007. There is a large empirical literature concerning the relation between asset price bubbles and financial crises. I evaluate the key studies with the respect to the following questions. To what extent do the empirical relations in the existing literature help to identify asset price bubbles ex-ante or ex-post? Do the empirical studies have theoretical foundations? On the basis of that critique, I explain why the application of stochastic optimal control (SOC)/dynamic risk management is a much more effective approach to determine the optimal degree of leverage, the optimum and excessive risk and the probability of a debt crisis. The theoretically founded early warning signals of a crisis are shown to be superior, in general, to those empirical relations in the literature. Moreover the SOC analysis provides a theoretical explanation of the extent that the empirical measures in the literature can be useful. |
| Subjects: | | stochastic optimal control mortgage and financial crises Ito equation optimal dynamic risk management warning signals of crisis optimal leverage and debt ratios Congressional Oversight Panel Case-Shiller index |
| JEL: | | C61 D81 D91 D92 G10 G11 G12 G14 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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