This article studies an economy with borrowers (firms or individuals) under costly default. Borrowers defaulting under adverse economic conditions may, despite incurring default costs, emerge as wealthier than nonborrowers. Asset substitution is generally not pronounced, although a larger risk...

This Paper studies the optimal policies of borrowers (firms or individuals) who may default subject to default costs, and analyses the asset pricing implications. Borrowers defaulting under adverse economic conditions may, despite incurring default costs, emerge as wealthier than non-borrowers...

The incomplete information financial economic equilibrium (IIE) literature has been growing at an increasing rate since its inception in the early 1980s. This paper examines issues and concepts essential to understanding, implementing, and testing IIE and understanding its relation to complete...

This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-at-Risk (VaR). We find that VaR risk managers often optimally choose a larger exposure to risky assets than non risk managers,...

We analyze the joint effect of borrowing and short-sale constraints in a dynamic economy populated by two constrained investors with heterogeneous risk aversions and beliefs. We find that equilibrium prices adjust in such a way that the constraints never simultaneously bind. When the constraints...

Wrong way risk (WWR) is a consideration for regulatory capital for credit valuation adjustment (CVA). WWR is also of interest for pricing and accounting and in these cases must include funding as well as exposure and default in CVA and FVA calculation. Here we introduce a model independent...

XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured/cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has...

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

This paper surveys the research on optimal consumption and investment problem of an agent who is subject to bankruptcy that has a specified utility (reward or penalty). The bankruptcy utility, modeled by a parameter, may be the result of welfare subsidies, the agent's innnate ability to recover...

In Kusuda [45], we developed equilibrium analysis in security market economy with jump-Wiener information where no finite number of securities can complete markets. Assuming approximately complete markets (Björk et al. [11] [12]) in which a continuum of bonds are traded and any contingent claim...