We examine the impact of risk-based portfolio constraints on asset prices in an exchange economy. Constrained agents scale down their portfolio and behave locally like power utility investors with risk aversion that depends on current market conditions. The imposition of constraints dampens...

We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/representative agent can be characterized by a specific semilinear partial differential...

This paper analyzes how insurance companies allow the issue of market incompleteness to be overcome. A general equilibrium economy is considered in which heterogeneous agents face endowment risks. Markets are incomplete: there are only markets for trading commodities ex-post and hedging price...

I propose a consumption-based asset pricing model that jointly explains the high equity premium, the counter-cyclical behaviour of stock returns, the upward sloping term structure of interest rates and the downward sloping term structure of equity. The driving forces behind these results are...

In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor-income risk can explain much of this...

It is well known that the implicit insurance provided by labor income taxes can reduce total saving. We show that this insurance can change the composition of saving as well because the reduction in labor-income risk may affect the amount of financial risk that an individual chooses to bear....

This paper proposes a pure-exchange economy with three key ingredients: habit formation, stochastic moments of aggregate consumption, and a small degree of heterogeneity in risk aversion consistent with empirical data. We obtain closed formulas for many equilibrium quantities, including the...

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

Changes in credit supply induce large and frequent variations in households' access to unsecured debt. They generate a novel financial precautionary motive, which compounds the classical motive associated with idiosyncratic income risk, as borrowers accumulate risk-free bonds to hedge against...

Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find...