This paper formalizes the idea that more hedging instruments may destabilize markets when traders are heterogeneous and adapt their behavior according to experience based reinforcement learning. We investigate three different economic settings, a simple mean-variance asset pricing model, a...

The objective is to study the use of non-translation invariant risk measures within the equal risk pricing (ERP) methodology for the valuation of financial derivatives. The ability to move beyond the class of convex risk measures considered in several prior studies provides more flexibility...

The paper presents a model of a risk-averse exporting firm under exchange rate risk. We focus on the economic implications of basis risk. It is shown that the regression dependence assumptions between spot and futures exchange rates are essential in analyzing optimal hedging and export...

We examine the impact of so-called "Crisis Contracts" on bank managers' risktaking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs....