Heterogeneously risk-averse individuals who lack access to formal insurance build and use relationships with each other to manage risk. I study the formation of these relationships. I show that the composition of equilibrium groups under pairwise matching and when group size is endogenous is...

This paper extends the methodology developed in Chien, Cole and Lustig (2011 & 2012) (hereafter CCL2011 and CCL2012, respectively) to analyze and compute the equilibria of economies with heterogeneous agents who have different asset trading technologies and are subject to both aggregate and...

This paper is no longer available on-line from the NBER. A revised version of the paper has been published as "Liability-Driven Investment with Downside Risk" in the Journal of Portfolio Management Fall 2013, Vol. 40, No. 1: pp. 71-87

Current practice largely follows restrictive approaches to market risk measurement, such as historical simulation or RiskMetrics. In contrast, we propose flexible methods that exploit recent developments in financial econometrics and are likely to produce more accurate risk assessments, treating...

Following the Pension Protection Act of 2006, there was a sharp increase in the use of TDFs as default investment options in defined contribution retirement plans. We document large differences in realized TDF returns and risk profiles, even for funds with the same target retirement date. Using...

The net effect of financial innovation on portfolio risks depends on the quantitative strength of its effects on the uninsurable and the speculative variances. I consider a calibration of the model for new assets linked to national incomes of G7 countries, which were recommended by Athanasoulis...

The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We analyze new and simple financial...

Assessing the importance of uninsurable wage risk for individual financial choices faces two challenges. First, the identification of the marginal effect requires a measure of at least one component of risk that cannot be diversified or avoided. Moreover, measures of uninsurable wage risk must...

In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify this model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state-dependent idiosyncratic risk premium...

Entrepreneurs face significant non-diversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial finance to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment,...