A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm...

We develop an asset-pricing model with heterogeneous investors and search frictions. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk-averse investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk...