Consider a one-factor pricing model where the dependent variable is the spread between a 5y Credit Default Swaps index and the 5y Treasury Note, while the factor is a stock market index. Assume that you estimate a negative coefficient for the factor. If one day you observe the spread located more than two standard deviations above the regression line, what portfolio do you build with positions on the CDS index, the Treasury Note and the stock market index? How will approach this question and explain, please ..read more

I'm trying to understand the idea of pricing kernels. I have a maths/computer science background so I understand that kernel methods map information from "data" space into high-dimensional "feature" spaces where we can process the information. We access the feature space through kernels or inner products of feature vectors. How are the kernel method and pricing kernel related to each other? What would be the finance equivalent to data space and feature space? How does one calculate the pricing kernel ..read more

Maria is a risk neutral agent who can invest in one of the two projects: Project A where she must pay 200 upfront and gain 600 if it rains, 800 if it snows, 400 if it hails and $0 if it is sunny. The other project is B where she must pay 300 upfront and gain 200 if it rains, 0 if it snows, 600 if it hails and 700 if it is sunny. The probabilities of raining, snowing, hailing and being sunny respectively are 0.1, 0.3, 0.2 and 0.4. The first part of the question asks us to find the net expected payoff for each case, and we infer that Maria chooses A because the expected payoff (180) is greater t ..read more

Do you think equilibrium can takes place without equating the demand and supply? Yes/No. Explain your answers theoretically and graphically. Also, define elasticity and show that elasticity in the middle of the demand curve is equal to 1 if demand equation is D = a - bP ..read more

Initially VAR studies used shocks to the equation innovations to derive the impulse responses. Later literature uses "narrative" shocks that are drawn from separate regression analysis. I’m having difficulty understanding what changes to the basic VAR-Cholesky setup is required to implement these narrative shock exercises. Can anyone offer a simple explanation or else direct me to a source that explains this rigorously but straightforwardly ..read more

Suppose one can get 4% return on bonds. Suppose the money multiplier (the ratio in the fractional reserve system) is 6. What is stopping a bank getting an easy 24% return ..read more

I wanted to know how this equation will look like and how we will be able to calculate the slope coefficient ..read more

Bank AAA is the only bank in the country and it has a very strange loan policy. It sets a relatively low interest rate for loans (but still high enough to make a profit) so that the demand for loans exceeds the amount of money the bank can lend. As a result, it has to deny some applications. However, it cannot check any credit history or do any client analysis; so, it chooses which applications to deny at random. What is the rationale for such a policy? My Thinking: It does make sense because the bank cannot check the credit history of clients, so doing so can make sure that the clients' credi ..read more

I'm curious to hear an explanation of the difference between an endogenous and an exogenous process, preferably with specific examples? My background is a BS in math which included just one econ course, and I wasn't very interested in econ at the time, but if I recall right they never discussed it. Of course, they might have and I simply forgot since it's been 30 years since I graduated. The dictionary definitions I've looked at so far aren't terribly enlightening. Feel free to use advanced math if you need to since that part isn't a problem, I just don't understand much of the economists' jar ..read more

Is George Soros' Reflexivity an economic analogue of Godel's Incompleteness theorems and/or Tarski's Undefinability (of truth) theorem in mathematical logic? If not, is there any such corresponding notion in economics ..read more