In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972))...

We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann (2000)). In particular, we show that, for any arbitrary value of social welfare in...

We examine the pricing of financial crash insurance during the 2007-2009 financial crisis in U.S. option markets. A large amount of aggregate tail risk is missing from the price of financial sector crash insurance during the financial crisis. The difference in costs of out-of-the-money put...

Any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the...

We build an equilibrium model with commodity producers that are averse to future cash flow variability, and hedge using futures contracts. Their hedging demand is met by financial intermediaries who act as speculators, but are constrained in risk-taking. Increases (decreases) in producers’...

The Sumitomo Corporation manipulated the London Metal Exchange (LME) copper price, which forms the pricing basis for the world copper market, from at least 1991 until earlier this year. This manipulation has concentrated attention on the functioning and governance of London futures markets, and...

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental...

The UK pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates and an inflation target was announced. This paper uses daily option prices to estimate how the market’s probability distribution of the future Deutsche...

This paper develops a theoretical model of how bookmakers’ odds are determined, given varying levels of inside information on the part of punters. Bookmakers’ attitudes towards risk and the degree of competition between them will influence bookmaker behaviour. Using a data set of 1696 races...

Based on a two-country, two-period general equilibrium model of the spot and futures markets for crude oil, we show that there is no theoretical support for the common view that oil futures prices are good predictors of the spot price in the mean-squared error sense; yet under certain conditions...