The Risky Steady State

2011 ◽  
Vol 101 (3) ◽  
pp. 398-401 ◽  
Author(s):  
Nicolas Coeurdacier ◽  
Hélène Rey ◽  
Pablo Winant
Keyword(s):  
Steady State ◽  
Interest Rate ◽  
Open Economy ◽  
Quantitative Method ◽  
Small Open Economy ◽  
Foreign Asset ◽  
Stochastic Interest Rate ◽  
Stochastic Interest ◽  
Net Foreign Asset

We propose a simple quantitative method to linearize around the risky steady state of a small open economy. Unlike when the deterministic steady state is used, the net foreign asset position is well defined. We allow for stochastic income and stochastic interest rate.

SAVINGS, INVESTMENT, EMPLOYMENT, AND INFLATION IN A SMALL OPEN ECONOMY WITH HABIT PERSISTENCE

2010 ◽  
Vol 14 (3) ◽  
pp. 365-387 ◽  
Author(s):  
Arman Mansoorian ◽  
Leo Michelis ◽  
Mohammed Mohsin
Keyword(s):  
Steady State ◽  
Open Economy ◽  
Inflation Rate ◽  
Small Open Economy ◽  
Living Standards ◽  
Representative Agent ◽  
Habit Persistence ◽  
High Inflation ◽  
Net Foreign Asset ◽  
Over Time

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.

PRICING VARIANCE SWAPS UNDER DOUBLE HESTON STOCHASTIC VOLATILITY MODEL WITH STOCHASTIC INTEREST RATE

2021 ◽  
pp. 1-17
Author(s):  
Huojun Wu ◽  
Zhaoli Jia ◽  
Shuquan Yang ◽  
Ce Liu
Keyword(s):  
Interest Rate ◽  
Closed Form ◽  
Stochastic Volatility ◽  
Stochastic Volatility Model ◽  
Characteristic Functions ◽  
Stochastic Interest Rate ◽  
Modeling Framework ◽  
Variance Swaps ◽  
Volatility Model ◽  
Stochastic Interest

In this paper, we discuss the problem of pricing discretely sampled variance swaps under a hybrid stochastic model. Our modeling framework is a combination with a double Heston stochastic volatility model and a Cox–Ingersoll–Ross stochastic interest rate process. Due to the application of the T-forward measure with the stochastic interest process, we can only obtain an efficient semi-closed form of pricing formula for variance swaps instead of a closed-form solution based on the derivation of characteristic functions. The practicality of this hybrid model is demonstrated by numerical simulations.

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