Contingent convertibles (CoCos) and bail-in debt for banks have been proposed as potential mechanisms to enhance financial stability. They function by converting to equity when a bank approaches insolvency. We develop a capital structure model to analyze the incentives created by these forms of...

Banking regulations set minimum levels of capital for banks. These requirements are generally formulated through a ratio of capital to risk-weighted assets. A risk-weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank's...

Affine jump-diffusion (AJD) processes constitute a large and widely used class of continuous-time asset pricing models that balance tractability and flexibility in matching market data. The prices of e.g., bonds, options, and other assets in AJD models are given by extended pricing transforms...

Many of the most widely used models in finance fall within the affine family of diffusion processes. The affine family combines modeling flexibility with substantial tractability, particularly through transform analysis; these models are used both for econometric modeling and for pricing and...

This paper develops formulas for pricing caps and swaptions in LIBOR market models with jumps. The arbitrage-free dynamics of this class of models were characterized in Glasserman and Kou (1999) in a framework allowing for very general jump processes. For computational purposes, it is convenient...

This paper characterizes the arbitrage-free dynamics of interest rates, in the presence of both jumps and diffusion, when the term structure is modeled through simple forward rates (i.e., through discretely compounded forward rates evolving continuously in time) or forward swap rates. Whereas...

The number of crossings of the implied volatility function with a fixed level is bounded above by the number of crossings of the risk-neutral density with the density of a log-normal distribution with the same mean as the forward price. It is bounded below by the number of convex payoffs priced...

Contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues. Specific proposals vary in their choice of conversion trigger and conversion mechanism. We...

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system.  We propose precise definitions of these concepts and analyze their magnitude.  Contagion occurs when a shock to the assets of a single firm causes other...