We present a model of flight to quality episodes that emphasizes financial system risk and the Knightian uncertainty surrounding these episodes. In the model, agents are uncertain about the probability distribution of shocks in markets different from theirs, treating such uncertainty as...

Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial...

China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of...

For nearly a decade prior to the collapse of structured finance markets in late 2007, securitization by collateralized loan obligations (CLOs) was a key source of capital for the high-yield corporate loan market. In this paper, we investigate whether securitization was associated with risky...

Financial market imperfections can have significant impact on employment decisions of firms. We illustrate the economic importance of this channel by demonstrating that the responsiveness of employment decisions to firms' financial health is quantitatively similar to the much-studied...

Since June 2007, the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2,000 and many downgrades were severe, with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11,000...

During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short) becomes exceedingly complex. Confusion and uncertainty follow, ravaging financial markets and triggering massive flight-to-quality...

Human beings want to believe that good outcomes in the future are more likely, but also want to make good decisions that increase average outcomes in the future. We consider a general equilibrium model with complete markets and show that when investors hold beliefs that optimally balance these...

Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried...

We present a model of flight to quality episodes that emphasizes systemic risk and the Knightian uncertainty surrounding these episodes. Agents make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with...