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Understanding Sudden Global Risk Spikes: A Comprehensive Study

Delve into the sudden spikes in global risk through a comprehensive analysis by Bacchetta & van Wincoop, presented by Seth Leonard and discussed by João Cunha. The study highlights risk panic, disconnect from macro fundamentals, and a two-country OLG static model with an analytical solution. Explore self-fulfilling dynamics, tractable analysis, multiple equilibria, and contributions to risk panic literature. Discover extensions on OLG structures, constant interest rates on bonds, booms/bubbles, and triggers of global risk panics, including credit crunches, reduction of leveraged positions, losses in financial markets, and expectations.

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Understanding Sudden Global Risk Spikes: A Comprehensive Study

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  1. Sudden Spikes in Global Risk Written by Bacchetta & van Wincoop Presented by Seth Leonard Discussed by João Cunha

  2. Summary • Risk Panic • Disconnect from Macro Fundamentals • Two country OLG static model with closed-form analytical solution • Self-fulfilling

  3. Summary • Very tractable • Multiple Equilibria • Contribution to the Risk Panics literature

  4. Extensions • OLG structure • Constant interest rate on bonds • Booms\Bubble • Triggers of (Global) Risk Panics

  5. Alternative Arguments • Credit Crunch • Reduction of Leveraged Positions • Losses in the Financial Markets • Expectations

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