Johan Walden

Bio: Johan Walden is an academic researcher from University of California, Berkeley. The author has contributed to research in topics: Capital asset pricing model & General equilibrium theory. The author has an hindex of 23, co-authored 73 publications receiving 1651 citations. Previous affiliations of Johan Walden include Uppsala University & University of California.

The limits of diversification when losses may be large.

Abstract: Recent results in value at risk analysis show that, for extremely heavy-tailed risks with unbounded distribution support, diversification may increase value at risk, and that generally it is difficult to construct an appropriate risk measure for such distributions. We further analyze the limitations of diversification for heavy-tailed risks. We provide additional insight in two ways. First, we show that similar non-diversification results are valid for a large class of risks with bounded support, as long as the risks are concentrated on a sufficiently large interval. The required length of the support depends on the number of risks available and on the degree of heavy-tailedness. Second, we relate the value at risk approach to more general risk frameworks. We argue that in markets for risky assets where the number of assets is limited compared with the (bounded) distribution support of the risks, unbounded heavy-tailed risks may provide a reasonable approximation. We suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes.

Nondiversification Traps in Catastrophe Insurance Markets

Abstract: We develop a model for markets for catastrophic risk. The model explains why insurance providers may choose not to offer insurance for catastrophic risks and not to participate in reinsurance markets, even though there is a large enough market capacity to reach full risk sharing through diversification in a reinsurance market. This is a “nondiversification trap.” We show that nondiversification traps may arise when risk distributions have heavy left tails and insurance providers have limited liability. When they are present, there may be a coordination role for a centralized agency to ensure that risk sharing takes place.

Investor Networks in the Stock Market

Abstract: We study investor networks in the stock market, through the lens of information network theory. We use a unique account level dataset of all trades on the Istanbul Stock Exchange in 2005, to identify traders who are similar in their trading behavior as linked in an empirical investor network (EIN). This empirical investor network is consistent with several predictions from the theory of information networks. The EIN is relatively stable over time, some investors systematically trade before their neighbors in the network, centrally placed investors earn higher profits, and the cross sectional distributions of profits and trading volume are heavy-tailed with similar tail exponents. We also identify several theoretical challenges for future research.

Random graphs

Abstract: We will review some of the major results in random graphs and some of the more challenging open problems. We will cover algorithmic and structural questions. We will touch on newer models, including those related to the WWW.

Stochastic Differential Equations

Abstract: We explore in this chapter questions of existence and uniqueness for solutions to stochastic differential equations and offer a study of their properties. This endeavor is really a study of diffusion processes. Loosely speaking, the term diffusion is attributed to a Markov process which has continuous sample paths and can be characterized in terms of its infinitesimal generator.

Why has CEO Pay Increased So Much

Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large fi rms explains many of the patterns in CEO pay, across firms, over time, and between countries. (JEL D2, D3, G34, J3)

Is Gold a Safe Haven? International Evidence

Abstract: The aim of this paper is to examine the role of gold in the global financial system. We test the hypothesis that gold represents a safe haven against stocks of major emerging and developing countries. A descriptive and econometric analysis for a sample spanning a 30 year period from 1979-2009 shows that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries. We also distinguish between a weak and strong form of the safe haven and argue that gold may act as a stabilizing force for the financial system by reducing losses in the face of extreme negative market shocks. Looking at specific crisis periods, we find that gold was a strong safe haven for most developed markets during the peak of the recent financial crisis.