We study how banks manage their default risk to optimally negotiate quantities and prices of contracts in over-the-counter markets. We show that costly actions exerted by banks to reduce their default probabilities are inefficient. Negative externalities due to counterparty concentration may...

We introduce an equity-credit portfolio framework taking into account the structural interaction of market and credit risk, along with their systemic dependencies. We derive a closed-form expression for the optimal investment strategy in stocks and credit default swaps (CDSs). We exploit its...

We consider a dynamic multitask principal-agent model in which the agent allocates his resources on two tasks of different types: effort and accident prevention. We explicitly characterize the optimal contract as well as optimal effort and prevention actions applied by the agent. In contrast to...

How can risk of a company be allocated to its divisions and attributed to risk factors? The Euler principle allows for an economically justified allocation of risk to different divisions. We introduce a method that generalizes the Euler principle to attribute risk to its driving factors when...

This article studies quadratic semimartingale BSDEs arising in power utility maximization when the market price of risk is of BMO type. In a Brownian setting we provide a necessary and sufficient condition for the existence of a solution but show that uniqueness fails to hold in the sense that...