This paper provides explicit and powerful tests of contingent claims approaches to modeling mortgage default. We investigate a model of "frictionless" default (i.e., one in which transactions costs, reputation costs and moving costs play no role) and analyze its implications--the relationship...

This paper analyzes the risk-taking behavior of financial intuitions that have guarantees and/or institutions that find it beneficial to develop a reputation for not taking risk. It focuses on two questions: Is it rational for them to take on less risk than they can get away with, and if it is...