Standard risk metrics tend to underestimate the true risks of hedge funds becauseof serial correlation in the reported returns. Getmansky et al. (2004) derive mean,variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Followingtheir lead, adjusted downside and global...

Contingent Convertible bonds (CoCos) are debt instruments that convert into equity or are written down in times of distress. Existing pricing models assume conversion triggers based on market prices and on the assumption that markets can always observe all relevant firm information. But all...

Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the...

We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic...

I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same...

I analyze welfare properties of mutual funds in the Diamond-Dybvig model with two sources of aggregate risk: undiversifiable interest rate risk and shocks to aggregate liquidity demand. Mutual funds are inefficient when the economy faces undiversifiable interest rate risk. However, if only...

Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model...

We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers differs, an interesting question from a supervisory point of view is the risk reduction that derives from diversification within large banks and financial...

Entry requires external finance, especially for less wealthy entrepreneurs, so poor investor protection limits competition. We model how incumbents lobby harder to block access to finance to entrants when politicians are less accountable to voters. In a broad cross-section of countries and...

We develop a model of endogenous lobby formation in which wealth inequalityand political accountability undermine entry and financial development. In-cumbents seek a low level of effective investor protection to prevent potentialentrants from raising capital. They succeed because they can...