Mortgage Default with Asymmetric Information

This article analyzes mortgage-market equilibrium when borrower default costs are private information. By applying the approach of Rothschild and Stiglitz (1976), it is shown that asymmetric information regarding default costs distorts the contract choices available in the mortgage market, preventing safe borrowers (those with high default costs) from fully satisfying their demand for mortgage debt. Large loans are available for a substantial interest-rate premium, but only risky borrowers find this premium worth paying. The article builds on an empirical literature designed to test the ruthless-default principle from option-based models of mortgage pricing. That literature provides evidence against ruthless behavior, suggesting that default costs play an important role in borrower decisions. The article takes a further step by arguing that such costs are private information, which has important implications for market equilibrium.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Sweden

Abstract

In this paper, the influence of IFRS on Swedish national accounting rules is analyzed. The lawmaker’s and standard setters’ response to EU Accounting Directive 2013/34/EU is studied, as well as the use of IFRS in enforcement. The conclusion is that IFRS have a strong position and legitimacy in Swedish financial reporting.     

Modelling jumps in electricity prices: theory and empirical evidence

Objective of this paper is to enhance the understanding of modelling jumps and to analyse the model risk based on the jump component in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the effectiveness of different jump specifications. To this end, we calibrate the models to daily European Energy Exchange (EEX) market data through Markov Chain Monte Carlo based methods. To assess the quality of the estimated jump processes, we analyse their trajectorial and statistical properties. Moreover, even when the models are calibrated to a cross-section of derivative prices substantial model risk remains.      

Growth and Risk: Methodology and Micro Evidence

How exposure to risk affects economic growth is a key issuein development. This article quantifies both the ex ante andex post effects of risk using long-running panel data for ruralhouseholds in Zimbabwe. It proposes a simulation-based econometricmethodology to estimate the structural form of a micro modelof household investment decisions under risk. The key findingis that risk substantially reduces growth in this particularsetting: the mean capital stock in the sample is (in expectation)46 percent lower than in the absence of risk. About two-thirdsof the impact of risk is due to the ex ante effect (that is,the behavioral response to risk), which is usually not takeninto account in policy design. These results suggest that policyinterventions that reduce exposure to shocks or that help householdsmanage risk could be much more effective than is commonly thought.     

Flexible pension take-up in social security

This paper studies the redistribution and welfare effects of increasing the flexibility of individual pension take-up. We use an overlapping-generations model with Beveridgean pay-as-you-go pensions and heterogeneous individuals who differ in ability and lifespan. We find that introducing flexible pension take-up can induce a Pareto improvement when the initial pension scheme contains within-cohort redistribution and induces early retirement. Such a Pareto improving reform entails the application of uniform actuarial adjustment of pension entitlements based on average lifespan. Introducing actuarial non-neutrality that stimulates later retirement further improves such a flexibility reform.