We build a moral hazard model to study incentives of financial intermediaries (shortly, bankers) facing a leverage-insurance trade-off in their investment choice. We demonstrate that the choice is affected by two recent transformations of the financial ecosystem bankers inhabit: (i) the rise of...

Reaching-for-yield--investors' propensity to buy riskier assets in order to achieve higher yields--is believed to be an important factor contributing to the credit cycle. This paper presents a detailed study of this phenomenon in the corporate bond market. We show that insurance companies, the...

Hedge funds and financial intermediaries are connected through their prime brokerage relationship. We find that systematic financial intermediary risk, as measured by the covariation between the hedge fund return and the return of a portfolio of key prime brokers, is important for understanding...

This book presents a method that combines game theory and option pricing in order to analyze dynamic multiperson decision problems in continuous time and under uncertainty. The basic intuition of the method is to separate the problem of the valuation of payoffs from the analysis of strategic...