Observers have often characterized asset markets as being subject to periods of tranquility and periods of turbulence. Until recently, however, researchers were unable to produce closed-form asset pricing formulas in a model environment of time-varying risk. Some work by Abel provided us with...

We use a simple model of international lending to show that an emerging market borrower who might default can be shut out of international capital markets without warning. A modest haircut on obligations, for example, can shut down lending. Copyright © 2009 The Authors. Journal compilation ©...