We argue that there is a connection between the interbank market for liquidity and thebroader financial markets, which has its basis in demand for liquidity by banks. Tightnessin the interbank market for liquidity leads banks to engage in what we term “liquiditypull-back,” which involves...

Bailing out banks requires overcoming debt overhang as well as dealing with adverseselection with respect to the quality of banks' balance sheets, in terms of heterogeneity inboth the likelihood and extent of their potential shortfalls, of future asset values vis-a-viscontractual debt...

It is well-known in empirical finance that virtually all asset returns, whether monthly,daily, or intraday, are heavy-tailed and, particularly for stock returns, are mildly but oftensignificantly negatively skewed. However, the tail indices, or maximally existing moments ofthe returns, can...

We solve the problem of optimal securitization for an issuer facing heterogeneous investorswith arbitrary time and risk preferences. We show that the optimal securitizationis characterized by multiple nonlinear tranches, and each investor gets a portfolio of thesetranches. In particular, when...

We study survival, price impact and portfolio impact in heterogeneouseconomies. We show that, under the equilibrium risk-neutral measure,long-run price impact is in fact equivalent to survival, whereas longrunportfolio impact is equivalent to survival under an agent-specic,wealth-forward...

Using an options-based approach, we compute the value of the state guaranteefor the liability side of CS and UBS. The insurance premiums forthese two system-relevant banks are calculated in a dynamic setup from2004 until 2009 in quarterly steps for time horizons of one and five years.The model...

This paper develops a dynamic trade-off model of optimal capital structure that takes intoaccount the fact that most firms have both invested assets and growth opportunities. Thesetwo sources of value react quite differently to business cycle risk. In particular, growth optionsare more sensitive...

This paper studies the extent to which risk-taking incentives of CEOs and other governancefeatures in a range of years prior to the recent financial crisis were related to the write-downsof U.S. financial institutions during the crisis. We document that institutions whose CEOs hadparticularly...

We propose a simple but effective estimation procedure to extract the level and the volatilitydynamics of a latent macroeconomic factor from a panel of observable indicators. Our approachis based on a multivariate conditionally heteroskedastic exact factor model that cantake into account the...

The pricing kernel puzzle is the observation that the pricing kernelmight be increasing in some range of the market returns. This paperanalyzes the pricing kernel in a nancial market equilibrium. If mar-kets are complete and investors are risk-averse and have common andtrue beliefs, the pricing...