XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured/cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has...

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

We develop a simple model in which financial imperfections can serve to stabilize aggregate fluctuations and not merely aggravate them as in much of the previous literature; we term this a financial decelerator.In our model agents borrow to purchase housing and secure their loans with this...

The opacity of over-the-counter (OTC) markets – in which a large number of financial products including credit derivatives trade – appears to have played a central role in the ongoing financial crisis. We model such OTC markets for risk-sharing in a general equilibrium setup where agents...

We construct a simple general equilibrium model in which agents borrow to purchase housing and secure their loans with this long-lived asset. As the housing price falls defaulting becomes a weaker signal of (poor) credit quality, since wealthier agents are forced to default. If housing prices...

We investigate the channel through which fluctuations in the market liquidity of real-sector repo collateral cause arbitrage crashes and failure of systemically important intermediaries during the global financial crisis. Intermediaries pledge productive capital as repo collateral to fund the...

Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery...

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic...

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic...

This paper investigates contagion in financial networks through both debt and collateral markets. Payment from a collateralized debt contract depends not only on the borrower's balance sheet but also on the price of the underlying collateral. I show that the existence of the collateral channel...