IDEAS home Printed from https://ideas.repec.org/p/gre/wpaper/2013-45.html
   My bibliography  Save this paper

Insolvency Traps and Multiple Equilibria Complex Dynamics in a Simple Bond Market

Author

Listed:
  • Alfredo Medio

    (GREDEG CNRS)

Abstract

The recent nancial market turmoil has raised the question whether certain countries, in particular Italy and Spain, were facing a liquidity or a solvency problem. Some economists re{phrased this problem, by asking whether those countries' crisis was triggered by investors' self- ful lling expectations which are not, or not entirely, justi ed by fundamentals. In the academic literature and the specialized press, this phenomenon is characterized by two related, "perverse" features: the presence of upward-sloping tracts of the demand for bond function and the associated multiple equilibria. In this paper, we discuss the question by means of a simpli ed mathematical representation of a single sovereign bond market, and show that the dynamics of the bond price (equivalently its yield) may be greatly more complicated than we are often led to believe. Even in the most favorable circumstances { a single equilibrium and an everywhere downward{sloping excess{demand function { the equilibrium may not be stable and the state variables may converge to a cycle around it, and more or less far from it. Second, if the single equilibrium is unstable and, due to the presence of upward{sloping tracts of the demand curve, the controlling map is non-monotonic, the asymptotic dynamics of the bond's price (and the corresponding yield) may be very complicated. In the multiple equilibria case, many different, more or less complicated dynamics (cyclical with different periods or even chaotic) may occur. These results suggest that the task of a central bank trying to stabilize the sovereign bond market by means of an external intervention may turn out to be far more dicult than expected.

Suggested Citation

  • Alfredo Medio, 2013. "Insolvency Traps and Multiple Equilibria Complex Dynamics in a Simple Bond Market," GREDEG Working Papers 2013-45, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2013-45
    as

    Download full text from publisher

    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2013-45.pdf
    File Function: First version, 2013
    Download Restriction: no

    More about this item

    Keywords

    insolvency trap; multiple equilibrium; complex dynamics;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gre:wpaper:2013-45. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patrice Bougette). General contact details of provider: http://edirc.repec.org/data/credcfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.