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Capital structure, investment, and fire sales

Gale, Douglas; Gottardi, Piero - London School of Economics (LSE) - 2014

, trading off the tax advantages of debt against the risk of costly default. The costs of bankruptcy are endogenously determined … corporate income tax rate is positive, firms have a unique optimal capital structure. In equilibrium firms default with positive … constrained inefficient. In particular there is too little debt and too little default. …

Persistent link: https://www.econbiz.de/10011170093

Equilibrium analysis, banking, contagion and financial fragility

Tsomocos, Dimitrios P. - London School of Economics (LSE) - 2003

This paper contains a general equilibrium model of an economy with incomplete markets (GEI) with money and default. The … for positive default levels in equilibrium. It also characterises contagion and financial fragility as an equilibrium …

Persistent link: https://www.econbiz.de/10010884714

Option hedging for small investors under liquidity costs

Soner, H. Mete; Cetin, Umut; Touzi, Nizar - London School of Economics (LSE) - 2010

Following the framework of Cetin et al. (finance stoch. 8:311-341, 2004), we study the problem of super-replication in the presence of liquidity costs under additional restrictions on the gamma of the hedging strategies in a generalized black-scholes economy. We find that the minimal...

Persistent link: https://www.econbiz.de/10010745343

Efficiency and equilibrium when preferences are time-inconsistent

Luttmer, Erzo G. J.; Mariotti, Thomas - London School of Economics (LSE) - 2003

We consider an exchange economy with time-inconsistent consumers whose preferences are additively separable. When these consumers trade in a sequence of markets, their time-inconsistency may introduce a non-convexity that gives them an incentive to trade lotteries. If there are many consumers,...

Persistent link: https://www.econbiz.de/10010884660

Optimal Monetary Policy in a Small Open Economy: a General Equilbirium Analysis.

Carlstrom, C.T.; Fuerst, T.S. - London School of Economics (LSE) - 1999

This paper uses a small open economy model to address two outstanding issues in monetary policy: (1) what restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy, and (2) what is the optimal long run rate of inflation. The small open...

Persistent link: https://www.econbiz.de/10005776307

Rational limits to arbitrage

Zigrand, Jean-Pierre - London School of Economics (LSE) - 2001

It is often argued that asset prices exhibit patterns incompatible with the behaviour of rational, optimizing agents. This paper proposes a rational framework which generates asset prices which appear irrational. This is accomplished by studying rational expectations equilibria in the presence...

Persistent link: https://www.econbiz.de/10010745688

Equilibrium asset pricing with systemic risk

Danielsson, Jon; Zigrand, Jean-Pierre - London School of Economics (LSE) - 2006

We provide an equilibrium multi-asset pricing model with micro-founded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risk-sensitive financial regulations are introduced with a view of...

Persistent link: https://www.econbiz.de/10010746199

What happens when you regulate risk?: evidence from a simple equilibrium model

Zigrand, Jean-Pierre; Danielsson, Jon - London School of Economics (LSE) - 2001

The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the...

Persistent link: https://www.econbiz.de/10010746696

Equilibrium asset pricing with systemic risk

Danielsson, Jon; Zigrand, Jean-Pierre - London School of Economics (LSE) - 2008

We provide an equilibrium multi-asset pricing model with micro- founded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risk-sensitive financial regulations are introduced with a view of...

Persistent link: https://www.econbiz.de/10011126632

Endogenous liquidity and contagion

Rahi, Rohit; Zigrand, Jean-Pierre - London School of Economics (LSE) - 2009

Market liquidity is typically characterized by a number of ad hoc metrics, such as depth, volume, bid-ask spreads etc. No general coherent denition seems to exist, and few attempts have been made to justify the existing metrics on welfare grounds. In this paper we propose a welfare-based...

Persistent link: https://www.econbiz.de/10010884503