Many bankruptcy codes implicitly or explicitly contain net-worth covenants, which provide the firm's bondholders with the right to force reorganization or liquidation if the value of the firm falls below a certain threshold. In practice, however, default does not necessarily lead to immediate...

This paper investigates the effects of financial institutions issuing contingent capital, a debt security that automatically converts into equity if assets fall below a predetermined threshold. We decompose bank liabilities into sets of barrier options and present closed-form solutions for their...

Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the...

We present an equilibrium model of financial institutions to examine the optimal regulation of risk taking. Shareholders set compensation incentivizing management to increase risk to excessive levels. Regulators use caps on asset risk and compensation to achieve the socially optimal risk level....

This paper proposes a new method to measure the impact of inflation on the real value of public debt. The distribution of debt debasement is based on two inputs: the distribution of privately-held nominal debt by maturity, for which we provide new estimates, and the distribution of risk-adjusted...

Textual analysis of 14,270 NBER Working Papers published during 1999–2016 is done to assess the effects of the 2008 crisis on the economics literature. The volume of crisis-related WPs is counter-cyclical, lagging the financial-instability-index. WPs by the Monetary-Economics, Asset-Pricing,...

Black and Cox (1976) claim that the value of junior debt is increasing in asset risk when the firm's value is low. We show, using closed-form solution, that the junior debt's value is hump-shaped. This has interesting implications for the market-discipline role of banks' junior debt (subdebt)

We present a structural method for measuring the upper bound for the illiquidity risk of liabilities issued by a levered firm. The method calculates the upper bound of illiquidity spread of a corporate bond given its duration and the issuing firm's asset risk and leverage ratio. Consistent with...

We present a theory for the puzzling issue regarding why certain firms in financial distress, prefer a costlier formal bankruptcy procedure over direct renegotiations. We show that claimholders' heterogeneous beliefs about the results of a formal plan and about judicial discretion may lead to...