Given an underlying complete financial market, we study contingent claims whose payoffs may depend on the occurrence of nonmarket events. We first investigate the almost-sure hedging of such claims. In particular, we obtain new representations of the hedging prices and provide necessary and...

Previous research has shown that under a suitable no-jump condition, the price of a defaultable security is equal to its risk-neutral expected discounted cash flows if a modified discount rate is introduced to account for the possibility of default. Below, we generalize this result by...

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.

Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models...

Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a “contagious” response of the market portfolio during the credit event....

We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is...

Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend...

Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several liquidity measures reveal the presence of informed trading. The evidence suggests that when Schedule 13D...

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...

This short note gives a short overview of correlation markets and was prepared for the "Roundtable Discussion on Default Risk Correlation Models" given at the inaugural SoFiE-Conference in June 2008. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For...