We study a two-agent pure exchange equilibrium subject to both nondiversifiable diffusive and jump risks. Agents can trade in a financial market consisting of a stock market, a money market, and an insurance market for jump risk. Heterogeneity is introduced through different levels of relative...

Trading in the CDS market in this paper occurs because irrational investors have optimal beliefs about the default state of the economy, those investors tend to be overly optimistic that default is less likely. Since the imposition of the CDS ban on member states of the European Union in 2012,...

This paper provides a new approach to model the common variation in the term structure of credit spreads. The novelty is that common factors are extracted using canonical relations between credit spreads and observable economic variables. We show how these factors can be used to test if a given...

This paper provides an equilibrium model subject to heterogeneous beliefs about the likelihood of rare events. I explore asset pricing implications in an incomplete capital market and the effects of market completion. Without explicit rare event insurance, investors insure themselves indirectly...

This paper re-examines to which extent catastrophe bond prices can be explained via investor preferences. I show that cat bond spreads equal between two and three times expected losses after controlling for bond-specific characteristics. At the occurrence of Katrina, the model predicts a 15-20%...

In a setting where the lender and the borrower have heterogeneous beliefs about the likelihood of a disastrous shock to the borrower's economy, we revisit the debt contract proposed by Barro (2006). We find that a higher belief by the lender compared to the borrower can lead to countercyclical...

We study the relation between daily stock market trading activity and the Dow Jones Industrial Average's (DJIA) movement around millenary milestones--numbers that end in three zeros. We find aggregate turnover to be 5% lower when the DJIA level is less than 1% away from the nearest milestone....

In a setting where the lender and the borrower have heterogeneous beliefs about the likelihood of a disastrous shock to the borrower's economy, we study the debt contract that defaults at the occurrence of that shock, as proposed by Barro (2006). We find that a higher belief by the lender...