In this review, we provide an economic assessment of the Dodd-Frank Act of 2010 in terms of the likely efficacy of the financial-sector regulation it proposes. We focus in particular on its ability to contain systemic risk, the risk that many financial firms may fail en masse, and discuss the...

We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity-seeking behavior by firms. Firms with high liquidity risk...

When liquidity chasing banks is high, loan officers (or risk-takers) inside banks expect future losses to be readily rolled over. This insurance effect induces them to relax lending standards. The resulting access to cheap credit can fuel asset price bubbles in the economy. To curb such...

Why did the popping of the housing bubble bring the financial system - rather than just the housing sector of the economy - to its knees? The answer lies in two methods by which banks had evaded regulatory capital requirements. First, they had temporarily placed assets - such as securitized...

One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) towards disaster resolution. We show that the stock market...

We propose and model that firms face two potential defaults: Financial default on their debt obligations and operational default such as a failure to deliver on obligations to customers. Hence, firms with limitations on outside financing substitute between saving cash for financial hedging to...

We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially constrained firms to hedge against future income shortfalls, reducing debt - "saving borrowing capacity" - is a more effective way of securing future investment in...

This paper solves explicitly an equilibrium asset pricing model with liquidity risk -- the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security's required return depends on its expected liquidity as well as on the...