The stress tests recommended by most central banks, for their supervisory review process, do not consider the probability of occurrence of the abnormal shocks. They also focus on worst-case scenarios and typically ignore the diversification benefits in a trading portfolio. However, stress tests...

A large body of literature has blamed moral hazard behaviour by banks, for triggering the recent global financial crisis. Many reasons have been cited for such incentive distortion, e.g. the originate-to-distribute approach, regulatory capital arbitrage or the possibility of systemic bailouts....

We develop a model of gestational surrogacy, in which a childless couple faces heterogeneous prospective surrogates. High-type surrogates add more value but also have higher outside options. Surrogates can make specific investments for the overall well-being (care) of the unborn child. We show...