We analyze the role of transaction costs in risk transfer markets. For example, when these markets are in their infancy, they are characterized by few contracts and high transaction costs. In this case, we show that only highly risk-averse buyers (e.g., hedgers) exist in the market alongside...

In traditional economic models of insurance, sellers typically employ a non-linear pricing scheme to elicit type information from buyers. In financial insurance contracts, such a policy is not possible since contracts are non-exclusive. In addition, counterparty risk in financial contracts can...

What market features of financial risk transfer exacerbate counterparty risk? To analyze this, we formulate a model which elucidates important differences between financial risk transfer and traditional insurance, using the example of Credit Default Swaps (CDS). We allow for (heterogeneous)...

This paper analyzes credit risk transfer in banking. Specifically, we model loan sales and loan insurance (e.g. credit default swaps) as the two instruments of risk transfer. Recent empirical evidence suggests that the adverse selection problem is as relevant in loan insurance as it is in loan...

We apply exploratory data analysis to some of the basic models of neoclassical computational finance. These include the portfolio selection algorithm of Markowitz, the capital market line of Sharpe, and the option pricing model of Black-Scholes-Merton. We demonstrate that the Markowitzian...

We analyze the effect of counterparty risk on insurance contracts using the case of credit risk transfer in banking. In addition to the familiar moral hazard problem caused by the insuree's ability to influence the probability of a claim, this paper uncovers a new moral hazard problem on the...

We analyze the effect of counterparty risk on financial insurance contracts, using the case of credit risk transfer in banking. This paper posits a new moral hazard problem on the insurer side of the market, which causes the insured party to be exposed to excessive counterparty risk. We find...