We develop a model where banks invest in reserves and loans, and face aggregate liquidity shocks. Banks with liquidity shortage sell loans on the interbank market. Two equilibria emerge. In the no default equilibrium, all banks hold enough reserves and remain solvent. In the mixed equilibrium,...

A substantial body of research suggests that it is difficult to account for all of the asset price volatility in terms of news. This paper attempts to explain the excess volatility puzzle as a consequence of competitive interaction between market participants. We develop a model of competitive...

Most firms face some form of competition in product markets. The degree of competition a firm faces feeds back into its cash flows and affects the values of the securities it issues. Through its effects on stock prices, product market competition affects the prices of options on equity and...