The thesis analyses the moral hazard problem which arises in political or fiscal federations when member states anticipate being bailed out by the centre in case of financial distress. In particular, I examine whether an orderly default mechanism or deeper fiscal integration within the European Union can alleviate the soft budget constraint phenomenon and provide a solution to the sovereign debt crises engulfing the Eurozone and other parts of the world. The first essay adapts the standard Stackelberg approach of the bailout literature in order to study the effects of bankruptcy procedures on regional opportunistic behaviour. The insolvency mechanism is shaped by two parameters: the costs of default and the exemption level for public assets. The model lends support to the market discipline hypothesis if all public assets are exempt from seizure. If, by contrast, the exemption level for public assets is low, it is the central government rather than the credit market that discourages overborrowing since the former is incentivised to tax heavily indebted regions. The model's major policy insight is that an insolvency mechanism can lower the federation's welfare if it is not carefully designed. The second essay sheds light on the incentive effects of the sovereign debt restructuring mechanism which has been drafted by the Eurozone in response to the debt crisis. Employing a global game approach, the model analyses the impact of insolvency procedures on the size of the bailout, the level of effort exerted by the debtor country and EU welfare. Challenging some arguments in the policy literature, the model's major policy implication is that a half-hearted debt restructuring mechanism fails to mitigate the commitment and moral hazard problems embedded in the current EMU framework. The third essay questions the conventional wisdom that the Euro cannot survive without closer integration, using a simple political economy framework. The model compares the stability and welfare implications of the current "muddling through" scenario, an orderly default mechanism as well as a fiscal and a political union setting. Interestingly, the results suggest that the "muddling through" scenario is not more prone to break-up than the political or the fiscal union. The model's major policy recommendation is that implementing an orderly default mechanism and inserting an explicit exit clause into the European Treaties might prove more effective in preventing a Eurozone break-up than far-reaching institutional reforms.

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Thesis (Ph. D.)--UCLA, 2007. / Vita. Includes bibliographical references (leaves 68-69).

The thesis presents a survey of formalisms for non-monotonic reasoning, providing a sketch of the "state of the art" in the field. Reiter's logic for default reasoning is discussed in detail. Following this, a procedure which can determine the extensions of general finite default theories is demonstrated. The potential impact of this procedure on some of the other research in the field is explored, and some promising areas for future research are indicated. Grounds for cautious optimism about the tractability of default theories capable of representing a wide variety of common situations are presented. / Science, Faculty of / Computer Science, Department of / Graduate

We develop a bivariate binomial model to price Mortgage Servicing Rights (MSRs). Our model is an improvement over previous MSR pricing models by explicitly incorporating the realistic assumptions that there are additional costs involved in servicing delinquent loans. In addition to the Hilliard et al. mortgage-pricing tree, we extend additional sub-branches to model the borrower's decision of prepayment, cure, and foreclosure after a loan becomes delinquent. We then investigate how the value of the Mortgage Servicing Right varies with interest rate volatility, house price volatility, delinquency options, deficiency judgments, default penalties, forbearance periods, and speed of adjustments factors.

This dissertation consists of three chapters on the implications of the personal default option on the economy. In the first two chapters, I analyze how credit constraints faced by entrepreneurs are shaped by the legal environment for default that they face. In the third chapter, I explore the welfare implications of allowing financial intermediaries to charge different interest rates according to perceived probabilities of consumer bankruptcy. In the first chapter, I build a model where agents can pick a career and decide whether to default on their mortgage. The purpose of this model is to analyze the interaction between these decisions and the existence of different legal environments, regarding the degree of recourse that lenders have over the borrowers’ assets. The model yields three basic predictions. First, as lenders have more recourse, the cost of default for the borrower increases and default becomes less frequent. Second, as lenders have more recourse, the entrepreneurship threshold (i.e. the amount of home equity a homeowner requires to become an entrepreneur) also increases. Third, where lenders have relatively less recourse, the size of the entrepreneurship threshold reduction due to a house price increase is larger. In the second chapter I test the validity of the third prediction of the model, which encompasses the other two. Using U.S. data, I find that the margins of creation for small young firms responded strongly to the increase in house prices between 2000 and 2007. This effect was driven by those areas where mortgage default is relatively less costly (less recourse). This link between house prices and entrepreneurial activity becomes weaker after the Great Recession. The third chapter explores the effects of allowing financial intermediaries to charge different interest rates according to the debt profile of agents. It also studies the welfare implications of different bankruptcy schemes and those associated with removing the default option. My findings indicate that allowing for price discrimination and removing the bankruptcy option are both desirable. However, the welfare gain from a more stringent bankruptcy regulation is negligible compared to those of removing the bankruptcy option and allowing discrimination.

El restablecimiento es un principio de los sistemas argumentativos que permite considerar un argumento derrotado como justificado, cuando todos sus derrotadores se encuentran finalmente derrotados. Algunos contraejemplos al restablecimiento han sido propuestos en la literatura. Éstos sugieren que el restablecimiento no puede ser considerado como un principio general de la argumentación rebatible porque los argumentos restablecidos pueden sustentar conclusiones incorrectas. Algunos autores argumentan que el problema no se debe al restablecimiento, sino a la formalización de los ejemplos. La solución consiste en hacer al lenguaje lo suficientemente expresivo como para obtener los resultados correctos. También advierten que no se debe retocar la formalización sólo para obtener los resultados deseados frente a ejemplos concretos. Por lo tanto, este enfoque debe combinarse con la búsqueda de principios generales para la elección de una formalización correcta. Teniendo en cuenta que buscar principios generales de representación puede ser una empresa difícil, el objetivo de esta tesis consiste en la identificación de algún criterio que permita i. neutralizar los contraejemplos, ii. preservar el lenguaje formal original, tanto como sea posible, y iii. mantener el restablecimiento como un principio general. Para identificar ese criterio, se analizan los contraejemplos y se detectan posibles causas del problema. Como resultado, se ha encontrado que la preferencia por especificidad entre argumentos puede ser usada para obtener tal criterio. Tres enfoques basados en tal preferencia se proponen y evalúan. Dos de ellos proponen la introducción de relaciones alternativas de derrota entre argumentos. El tercero se basa en un criterio de filtrado de los argumentos no máximamente específicos. / Reinstatement is a principle of argumentation systems that enables the justification of a defeated argument when all its defeaters are in turn ultimately defeated. Some counterexamples to reinstatement have been offered in the literature. Specifically, counterexamples suggest that reinstatement cannot be taken as a general principle of defeasible argumentation because the reinstated arguments may support incorrect conclusions. Some authors argued that the problems are not due to reinstatement but to the formalization of those examples. Then, the solution is to make the language expressive enough to obtain the correct results. They also warn that one should avoid tinkering with the formalization in concrete examples just to get a desired outcome. Therefore, this approach should be combined with the search of general principles for choosing the proper formalization. Taking into account that finding general principles of representation could be a hard enterprise, the goal of this thesis is to identify some criterion that allows i. neutralize the counterexamples, ii. preserve the original formal language as much as possible, and iii. maintain reinstatement as a general principle. To identify that criterion, counterexamples are analyzed and possible causes of the problem are detected. As a result it is found that the preference by specificity among arguments can be used to obtain that criterion. Three approaches based on specificity are proposed and evaluated. Two of them introduce alternative defeat relations among arguments. The third one is based on filtering the non maximally specific arguments.

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Credit risk models widely used in the financial market nowadays assume that losses are normally distributed and have linear dependence. Nevertheless it is well known that asset returns (loans included) are not normally distributed and present tail dependence. Therefore the traditional approaches are not able to capture possible stronger association among higher losses and tend to underestimate the probability of joint extreme losses. Copula functions are an alternative to overcome this drawback since they yield accurate dependence measures regardless of the distribution of the variables analysed. This technique was first applied to credit risk in 2000 but the studies in this field have been concentrated on corporate debt and derivatives. We filled this gap in the literature by employing copulas to estimate the dependence among consumer loans. In an empirical study based on a credit card portfolio of a large UK bank, we found evidence that standard models are misspecified as the dependence across default rates in the dataset is seldom expressed by the (Gaussian) copula implicit in those models. The comparison between estimations of joint high default rates from the conventional approach and from the best-fit copulas confirmed the superiority of the latter method. The initial investigation concerning pairs of credit segments was extended to groups of three segments with the purpose of accounting for potential heterogeneous dependence within the portfolio. To do so, we introduced vine copulas (combinations of bivariate copulas to form high-dimension copulas) to credit risk and the empirical estimations of simultaneous excessive defaults based on this technique were better than both the estimations from the pairwise copulas and from the conventional models. Another contribution of this work concerns the application of copulas to a method derived from the limited credit models: the calculation of the capital required to cover unexpected losses in financial institutions. Two models were proposed and, according to simulations, outperformed the current method (Basel) in most of the scenarios considered.