The recursive prediction and filtering formulas of the Kalman filter are difficult to implementin nonlinear state space models. For Gaussian linear state space models, or for models with qualitativestate variables, the recursive formulas of the filter require the updating of a finite number...

Recent crises have seen very large spikes in asset price risk without dramatic shiftsin fundamentals. We propose an explanation for these risk panics based on selffullling shifts in risk made possible by a negative link between the current assetprice and risk about the future asset price. This...

In a Lucas orchard with heterogeneous beliefs, we study the link between market-wide uncertainty, difference of opinionsand co-movement of stock returns. We show that this link plays an important role in explaining the dynamics of equilibriumvolatility and correlation risk premia. In our...

Richer and healthier agents tend to hold riskier portfolios and spend proportionallyless on health expenditures. Potential explanations include health and wealth eects onpreferences, expected longevity or disposable total wealth. Using HRS data, we perform astructural estimation of a dynamic...

We build a general model for pricing defaultable claims. In addition to the usual ab-sence of arbitrage assumption, we assume that one defaultable asset (at least) looses value when thedefault occurs. We prove that under this assumption, in some standard market ltrations, defaulttimes are...

We argue that there is a connection between the interbank market for liquidity and thebroader financial markets, which has its basis in demand for liquidity by banks. Tightnessin the interbank market for liquidity leads banks to engage in what we term “liquiditypull-back,” which involves...

Bailing out banks requires overcoming debt overhang as well as dealing with adverseselection with respect to the quality of banks' balance sheets, in terms of heterogeneity inboth the likelihood and extent of their potential shortfalls, of future asset values vis-a-viscontractual debt...

It is well-known in empirical finance that virtually all asset returns, whether monthly,daily, or intraday, are heavy-tailed and, particularly for stock returns, are mildly but oftensignificantly negatively skewed. However, the tail indices, or maximally existing moments ofthe returns, can...

We solve the problem of optimal securitization for an issuer facing heterogeneous investorswith arbitrary time and risk preferences. We show that the optimal securitizationis characterized by multiple nonlinear tranches, and each investor gets a portfolio of thesetranches. In particular, when...

We study survival, price impact and portfolio impact in heterogeneouseconomies. We show that, under the equilibrium risk-neutral measure,long-run price impact is in fact equivalent to survival, whereas longrunportfolio impact is equivalent to survival under an agent-specic,wealth-forward...