Julio: > Are you saying that, in those circumstances, you (the central bank) > will be less risk averse (and will deploy resources to back that up) > than the average player, buy those Eurobonds, and slow -- even stop > -- the bleeding?
It all depends on how my utility function differs from that of the average player, does it not? As a central bank I do not care if I lose a few billion dollars here and there, as long as I move in the direction of my optimal solution. You seem to be thinking in terms of "univariate risk aversion" whereas it is better to think in terms of "multivariate risk aversion". That is, it is better to think in terms of directional derivatives. If the weights the average player and I assign to the entries of the consumption bundle are different, then there is no way we can say which one of us is more or less risk averse, since along one direction I may be more risk averse and along another direction the average player may be more risk averse. It all depends on the direction we are looking at. > Aren't these assets are near substitutes of one another and aren't > the markets the largest ever? I am not sure which assets you are talking about? The Argentinian and Turkish Eurobonds or the US Treasuries and Turkish Eurobonds. The former two are near substitutes whereas the latter two are not. And this is the problem with what I am suggesting. The US Treasuries are equivalent to cash whereas the remaining two are not. This was what Doug was talking about. But if I can create a market in which all of the Argentinian, Venezuelan, Brazilian, Turkish and the like Eurodollar bonds are highly liquid, then all of these bonds behave like cash and I am okay. The question is: can I create such a market? That is, will Argentina, Venezuela, Brazil, Turkey and the like choose the cooperative equilibrium? Sabri ____________________________________________________________________________________ Looking for a deal? Find great prices on flights and hotels with Yahoo! FareChase. http://farechase.yahoo.com/
