Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model ...

We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short position in a call option, both with zero strike and written on the residual net value of the contract...

This paper asks why Argentina slipped into a deep crisis with its currency board (CB) arrangement though this regime had received so much academic support as a stabilisation device. It is argued that a CB does not make devaluation risks disappear but translates them into an explosive, strongly pro-cyclical mixture of exchange rate, financial system and default risk which might trap a country in...

In this paper we address a fundamental problem of the standard one factor Gaussian Copula model. Within this standard framework a default event will have a large impact on the default probability of the survivors, through a shock in available information on the common factor. Moreover this effect is larger for defaults occurring instantaneously. In this paper it is shown that this problem is ca...

Functional imaging studies have shown reduced activity within the default mode network during attention-demanding tasks. The network circuitry underlying this suppression remains unclear. Proposed hypotheses include an attentional switch in the right anterior insula and reciprocal inhibition between the default mode and attention control networks. We analyzed resting state blood oxygen level de...

We show how to analyze and interpret the correlation structures, the conditional expectation values and correlation coefficients of exchangeable Bernoulli random variables. We study implied default distributions for the iTraxx-CJ tranches and some popular probabilistic models, including the Gaussian copula model, Beta binomial distribution model and long-range Ising model. We interpret the diff...

We develop an arbitrage-free valuation framework for bilateral counterparty risk, where collateral is included with possible re-hypothecation. We show that the adjustment is given by the sum of two option payoff terms, where each term depends on the netted exposure, i.e. the difference between the on-default exposure and the pre-default collateral account. We then specialize our analysis to Cre...