We develop a tractable partial equilibrium model to analyze the impact on the bond market generated by a ban on naked credit default swaps (CDS). We demonstrate that such a ban will have a negligible impact on the borrowing costs if CDS speculators are risk averse and take positions which are...

We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short...

We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge against supply and demand shocks. But the social benefits of such investments are not internalized due to market power and market incompleteness. Upstream...

We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process, and a defaultable bond, whose prices are determined via...

Using a suitable change of probability measure, we obtain a novel Poisson series representation for the arbitrage- free price process of vulnerable contingent claims in a regime-switching market driven by an underlying continuous- time Markov process. As a result of this representation, along...

We consider the problem of maximizing expected utility for a power investor who can allocate his wealth in a stock, a defaultable security, and a money market account. The dynamics of these security prices are governed by geometric Brownian motions modulated by a hidden continuous time finite...