Continuous and discrete time modelling of short-term interest rates

Publisher:
Palgrave Macmillan
Publication Type:
Chapter
Citation:
Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models, 2011, 1st, pp. 163 - 187
Issue Date:
2011-01
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The Madoff case has all the makings of a Pona! scheme. Ponzi schemes follow what Hyman Minsky described as Ponzi finance. Do hedge funds, or at least some of them, follow a similar scheme? The best summary of different financing practices, such as hedge, speculative, and Ponzi financing, is given in Minsky (1986). Hedge finance is a situation where operating cash flow can service all payment obligations associated with the financing. Speculative finance involves situations where operating cash flow supports interest payments but not repayment of principal. Ponzi finance describes a situation where operating cash flow is insuffiCient to cover either principal or interest payments, which can be financed only via an increase in liabilities, thus by a new inflow of funds.
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