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Solving non-linear, stochastic differential equations with Uhlig algorithms

100%
Horvath A.
Kozgazdasagi Szemle (Economic Review)
|
2006
|
vol. 53
|
issue 3
235-252
EN
Stochastic, dynamic models are frequently used in modern economic analyses. In macroeconomic models resting on microeconomic bases, for instance, the conditions for solving general equilibrium models can be described using a non-linear, stochastic system of differential equations. This prescription-like article shows that the simpler systems - thanks to advances in computer technology - can be solved and analysed with graduate-level knowledge of economics. The algorithm in Blanchard and Kahn's 1980 study presents, as a solution to a matrix-equation system, the recursive form of such models. This the German economist Harald Uhlig transformed in 1999 for the purpose of computerization, so that he is often cited by users. There are two important restrictive criteria for applying the method: that the models should exist in their permanent state, and that they should be susceptible to linear approach. Two examples illustrate how the means necessary for solution do not exceed the level of fairly complex multiplicator analyses. With the model of real business cycles (RBC), the steps are given in detail. This is followed by a brief introduction to a sticky-price model representing a short-term application.
2

FAIR VALUE AND INTEREST RATE RISK OF DEMAND DEPOSITS

75%
Strnad P.
Ekonomický časopis (Journal of Economics)
|
2009
|
vol. 57
|
issue 7
682 – 699
EN
Demand deposits play an important role for commercial banks as they represent relatively reliable funding base as well as a source of income (they are remunerated below market rates, sometimes even at zero rates). At the same time, demand deposits are also responsible for significant part of volatility of profit and loss (P&L) – both economic and accounting. This paper demonstrates how the interest rate risk of demand deposits may be assessed and hedged under earnings perspective and economic value perspective and discusses whether these approaches are consistent with low volatility of accounting P&L.
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