This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price...

We present an intertemporal consumption model of consumer investment in financial literacy. Consumers benefit from such investment because their stock of financial literacy allows them to increase the returns on their wealth. Since literacy depreciates over time and has a cost in terms of...

This paper studies the market quality of an internalization system which is designed as part of an open limit order book (the Xetra system operated by Deutsche Börse AG). The internalization sys-tem (Xetra BEST) guarantees a price improvement over the inside spread in the Xetra order book. We...

In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of...

Buffer-stock models of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of such models, including the existence of a target wealth ratio and the proposition that aggregate consumption growth equals...

Insurance contracts are often complex and difficult to verify outside the insurance relation. We show that standard one-period insurance policies with an upper limit and a deductible are the optimal incentive-compatible contracts in a competitive market with repeated interaction. Optimal group...

This paper addresses the open debate about the usefulness of high-frequency (HF) data in large-scale portfolio allocation. Daily covariances are estimated based on HF data of the S&P 500 universe employing a blocked realized kernel estimator. We propose forecasting covariance matrices using a...

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the...

In this paper the authors present a New Keynesian quantitative model with endogenous investment and stock-market sector that may shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and which indicator may be expected to...

The existence of an exact Walrasian equilibrium in nonconvex economies is still a largely unexplored issue. This paper shows that such an equilibrium exists in nonconvex economies by following the nearby economyapproach introduced by Postlewaite and Schmeidler (Approximate Walrasian Equilibrium...