We embed systematic default, procyclic recovery rates and habit persistance into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to the...

This paper examines the effects of major event risk on the optimal intertemporal asset allocation in a continuous time setting. We start by firstly proposing a general framework in which we model three types of event risks: i) the individual jumps of asset prices, ii) the individual jumps of the...

This paper outlines a dynamic model with three levels of government: federal, state and local in the Stackelberg game structure with the superor government as the leader and all its subordinate governments the followers.It studies the optimal design of block grants and matching grants from both...

This paper proposes a general equilibrium model that explains the pricing of the S&P 500 index options. The central ingredients are a peso component in the consumption growth rate and the time-varying risk aversion induced by habit formation which amplifies consumption shocks. The amplifying...

This paper presents a consumption-based general equilibrium model for valuing foreign exchange contingent claims. The model identifies a novel economic mechanism by exploiting highly but imperfectly shared consumption disaster with variable intensities which are the concerns to the...

Previous studies have documented the impacts on asset valuations under pricing environments with structural changes which is modeled by regime switching. Below, I extend previous models by providing general formulas for valuing assets in the setting of affine factor processes augmented with...

This paper proposes a new methodology of using the Samp;P 500 index option data to gauge the magnitudes of the potential economic disasters in the U.S. with a setup incorporating a small-probability consumption jump and habit formation. The estimated economic disasters strike once every 36-64...