This model adds to the standard neoclassical model of business fluctuations by introducing a more realistic capital structure problem, where firms have to balance the tax benefits of debt with the costs of potential financial distress. Therefore, firms solve a dynamic problem with both an...

This paper develops a quantitative framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and...

As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of markets to converge towards fundamental values. This paper confirms their insights theoretically within the evolutionary finance model of Evstigneev, Hens, and Schenk-Hopp (2006)...

Economic cycles are the key credit portfolio risk driver and they are autocorrelated over time. We then show that it is economically meaningful to define risk for credit portfolios in a multi period setup. Since one period expected shortfall fails to measure risk adequately in a multi period...

In this paper, we characterize explicitly the first derivative of the Value at Risk and the Expected Shortfall with respect to portfolio allocation when netting between positions exists. As a particular case, we examine a simple Gaussian example in order to illustrate the impact of netting...

This paper analyzes the relation between agency conflicts and risk management in a contingent claims model of the firm. In contrast to previous contributions, our analysis incorporates not only stockholder-debtholder conflicts but also managerstockholder conflicts. In particular we consider a...

The paper investigates how buyer-supplier firm-specific relationships affect security prices. Starting from the empirical inconsistencies associated with some standard structural models we propose a structural model of firm dependence in a vertically connected network of firms based on cash flow...

This paper analyzes the expected life-time utility and the hedging demands in an exchange only, representative agent general equilibrium under incomplete information. We derive an expression for the investor’s expected life-time utility, and analyze his hedging demands for intertemporal changes...

Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by...

We investigate the influence of various variables on credit default swap transaction data. Credit derivatives are arguably a superior proxy to credit risk than bond spreads. The variables considered include fixed-income as well as equity markets data. We thus provide an international analysis of...