An extensive and growing literature examines how households smooth consumption in response to idiosyncratic income shocks. Many of these studies focus on the role played by government programs such as unemployment insurance (Gruber, 1997; Browning and Crossley, 2001), AFDC (Gruber, 2000), or Food Stamps (Blundell and Pistaferri, 2003). Other studies have considered how households insure via private transfers (Bentolila and Ichino, 2004), or self-insure against income shocks through the earnings of other household members (Cullen and Gruber, 2000), by postponing purchases of durable goods (Browning and Crossley, 2001), or by refinancing mortgage debt (Hurst and Stafford, 2004).
This paper contributes to this literature by considering another mechanism by which families can self-insure against income shocks borrowing through unsecured credit markets. There are important reasons to focus on unsecured credit markets in this context. First, unlike other components of net worth, unsecured debt is potentially available to families that have no assets to liquidate or to collateralize loans. Thus, these credit markets provide low-asset households with a unique mechanism for transferring their own income intertemporally. Second, with recent expansions in these markets, unsecured credit is potentially available to a substantial fraction of U.S. households. More than three-quarters of all U.S. households have a credit card, and outstanding balances on revolving credit exceed $750 billion (Federal Reserve, 2005). Recent research suggests that unsecured debt has become easier to obtain: limits on credit cards have become increasingly more generous; unsecured debt as a percentage of household income has grown; and the risk-composition of credit card loan portfolios has deteriorated (Evans and Schmalensee, 1999; Lupton and Stafford, 1999; Gross and Souleles, 2002; Lyons, 2003). Moreover, growth in credit card debt has been most striking among households below the poverty line. From 1983 to 1995, the share of poor households with at least one credit card more than doubled, from 17 percent to 36 percent, while average balances across poor households grew by a factor of 3.8, as compared to a factor of 2.9 for all households.
As described in Berkowitz and O’Brien (2002) and Berkowitz and O’Brien (2006), trading portfolios at large financial institutions exhibit two key characteristics: they are driven by a large number of financial variables, such as stock returns, credit spreads, or yield curves, and these variable have time-varying volatilities and correlations. To accurately capture risks in such portfolios, it is important for risk managers to select Value-at-Risk (VaR) methodologies that adequately handle these two characteristics. This paper presents one such VaR methodology that is based on Dynamic Factor Models (DFM, see for instance Stock and Watson (2002)).
Global changes are a very relevant issue for the whole world, but especially for developing countries that depend mainly on their natural resources to sustain their economic and social development. In the case of the Andes, most of the Latin-American countries source their raw materials, biological goods and environmental services from this mountain chain (IGM, 1983). Before the Spanish colonization that started in XV century, natural resources were used for the development of local territories, but with the establishment of colonial centres they were sent to the metropolis, thus forming the first economic and cultural globalization process.
Today for the first time global changes, such as climate change and economic globalization, challenge simultaneously the subsistence of many ecosystems, regions and places in Latin America. The Andes is a very diverse, complex and fluid environment. In this essay we deal with the Chilean part of this mountain chain, i.e. a section of the Central Andes (Northern Chile) and Southern Andes (Chilean Patagonia). These regions could be understood as a good representation of the present interaction between global changes and global economy that is taking place.
