This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing...

This paper studies competitive equilibria of a production economy with aggregate productivity shocks. There is a continuum of consumers who face borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The...

We propose a novel generalized recursive smooth ambiguity model which permits a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility model to a consumption-based asset pricing model in which consumption and dividends follow hidden...

Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze their joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum...

Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To afford this distinction, we adopt the multiple-priors...

This paper analyzes a risk averse entrepreneur's real investment decision under incomplete markets. The entrepreneur smoothes his intertemporal consumption by investing in both a risk-free asset and a risky asset, which allows him to partially hedge against the project cash flow risk. We show...

This paper studies consumption/saving problem under Knightian uncer- tainty in a two period setting. The multiple-priors utility model is adopted. The e®ects of income uncertainty and capital uncertainty on optimal savings are analyzed by deriving closed form solutions.