I explain the key failure mechanics of large dealer banks, and some policy implications. This is not a review of the Financial crisis of 2007-2009. Systemic risk is considered only in passing. Both the Financial crisis and the systemic importance of large dealer banks are nevertheless obvious...

A central counterparty (CCP) is a financial market utility that lowers counterparty default risk on specified financial contracts by acting as a buyer to every seller, and as a seller to every buyer. When at risk of failure, a CCP could be forced into a normal insolvency process such as...

Biographical note: DuffieDarrell: Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University's Graduate School of Business. His books include "How Big Banks Fail and What to Do about It" and "Dynamic Asset Pricing Theory" (both Princeton).

We derive closed form expressions for equilibrium asset prices and liquidity in an economy populated by a finite number of large, strategic, risk averse investors. The model allows for arbitrary risk preferences, any number of assets, and an arbitrary distribution of asset payoffs. In...

We consider an economy populated by CARA investors who trade, accounting for their price impact, multiple risky assets with arbitrary distributed payoffs. We propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With market...

We develop a rational model of trading behavior in which the agents gradually learn about their ability to trade, and exit after poor trading performance. We demonstrate that it is optimal for experienced traders to "procrastinate" and postpone exit even after bad results. We embed this "optimal...