In this paper we develop a structural model of counterparty risk . In particular we provide closed form formulae for the price of risky debt and equity, which depend up on the lending/borrowing relationships in the economy. Our model applies to completely general lender/borrower relationships,...

This paper presents a utility-based approach to value the borrower optimal behavior in presence of credit risk. The paper solves for the dynamic portfolio choices of a borrower. We thereby show that the presence of debt leads to a substantial modification in the borrower's behavior across states...

We develop intuitive expressions for the spread between a forwardcontract and a similar futures contract taking into account the pos-sibility of counterparty default. We evaluate these expressions nu-merically and show that the forward-futures spread is significant forrealistic parameter...

Most derivative contracts are traded over-the-counter, i.e., bilaterally between two counterparties. Recently, clearing services have become available that allow to transfer over-the-counter derivatives to a central counterparty (clearing house). We develop a framework to determine the effects...

This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as...

We empirically analyse the appropriateness of indexing emerging market sovereign debt to USreal interest rates. We find that policy-induced exogenous increases in US rates raise default riskin emerging market economies, as hypothesised in the theoretical literature. However, we also findevidence...

In a country with high probability of default, higher interest rates may render the currency lessattractive if sovereign default is costly. This paper develops that intuition in a simple model andestimates the effect of changes in interest rates on the exchange rate in Brazil using data from...