We propose a model that explains the build-up of short term debt when the creditors are strategic and have different beliefs about the prospects of the borrowers' fundamentals. We define a dynamic game among creditors, whose outcome is the short term debt process as a function of the borrower's...

This paper explores, in a multi-period setting, the funding liquidity of a borrower that finances its operations through short term debt. The short term debt is provided by a continuum of agents with heterogeneous beliefs about the prospects of the borrower. In each period, creditors observe the...

We analyze debt issuance in the continuous time limit and when the issuer's asset is subject to downward jump risk. We find the debt capacity in equilibrium and an illiquidity barrier. When the asset-to-debt ratio is above the barrier the issuer is liquid, whereas below the barrier it can no...

Let X be a continuous adapted process for which there exists an equivalent local martingale measure (ELMM). The minimal martingale measure P is the unique ELMM for X with the property that local P-martingales strongly orthogonal to the P-martingale part of X are also local P-martingales. We...

This paper gives an overview of results and developments in the area of pricing and hedging contingent claims in an incomplete market by means of a quadratic criterion. We first present the approach of risk-minimization in the case where the underlying discounted price process X is a local...

We propose a new approach to the pricing and hedging of contingent claims under transaction costs in a general incomplete market in discrete time. Under the assumptions of a bounded mean-variance tradeoff, substantial risk and a nondegeneracy condition on the conditional variances of asset...

In this paper, we consider a security market in which two investors on different information levels maximize their expected logarithmic utility from terminal wealth. While the ordinary investor's portfolio decisions are based on a public information flow, the insider possesses from the beginning...