How do firms manage recession risks? We solve a dynamic model with stochastic transitioning between recessions and expansions. In recessions, cash flows decline, cash-flow volatility increases, and both default and external financing costs increase. Firms manage the possibility of future...

This paper introduces a dual problem to study a continuous-time consumption and investment problem with incomplete markets and Epstein-Zin stochastic differential utility. Duality between the primal and dual problems is established. Consequently the optimal strategy of this consumption and...

In a market with stochastic investment opportunities, we study an optimal consumption investment problem for an agent with recursive utility of Epstein-Zin type. Focusing on the empirically relevant specification where both risk aversion and elasticity of intertemporal substitution are in excess...

In a Kyle (1985) model, the sign of the correlation between a firm's debt and equity returns is the same as the sign of the cross-market Kyle's lambda. The sign is positive (negative) if private information concerns the mean (risk) of the firm's assets. We show empirically that information...

We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given...