We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes stock-like. However,...

We investigate optimal capital structure and debt maturity policies in the presence of fixed issuance costs. We identify the global-optimal policy that generates the highest values of equity across all states of nature consistent with limited liability. The optimal policy without commitment...

We propose a tractable equilibrium model for pricing defaultable bonds that are subject to contagion risk. Contagion arises because agents with 'fragile beliefs' are uncertain about both the underlying state of the economy and the posterior probabilities associated with these states. As such,...

The 1987 stock market crash occurred with minimal impact on observable economic variables (e.g., consumption), yet dramatically and permanently changed the shape of the implied volatility curve for equity index options. Here, we propose a general equilibrium model that captures many salient...

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic...

The empirical literature on the asset allocation and medical expenditures ofU.S. households consistently shows that risky portfolio shares are increasing inboth wealth and health whereas health investment shares are decreasing in thesesame variables. Despite this evidence, most of the existing...

This article shows that, as long as agents are required to maintain positivewealth, the presence of portfolio constraints may give rise to asset pricingbubbles in equilibrium even if there are unconstrained agents in the economywho can benefit from the induced arbitrage opportunity. Furthermore,...

This paper analyzes competition between mutual funds in a multiple fundsversion of the model of Hugonnier and Kaniel [18]. We characterize the setof equilibria for this delegated portfolio management game and show thatthere exists a unique Pareto optimal equilibrium. The main result of thispaper...

The classic Lucas asset pricing model with complete markets stresses aggregate risk and, hence, fails to investigate the impact of agents heterogeneity on the dynamics of the equilibrium quantities and measures of trading volume. In this paper, we investigate under what conditions...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However in most situations, corporate executives face incomplete markets either because they receive compensation packages...