I present a theory of financial contracts that transfer risk from one party to another. Risk reduction is equivalent to adding inside noise to payoffs; this addition shifts probability weight away from the tails of a payoff's distribution. Adding outside noise is the inverse operation and it...

In a Kyle (1985) model, the sign of the correlation between a firm's debt and equity returns is the same as the sign of the cross-market Kyle's lambda. The sign is positive (negative) if private information concerns the mean (risk) of the firm's assets. We show empirically that information...

We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given...