We present a general pricing framework applicable in the context of funding and credit risks, with a wide class of underlying jump-diffusion processes, and an extension to this framework for dealing with a particular type of incompleteness. When applied to the special case of incompleteness due...

An economy faces an unknown individual risk, such as the health effects of a recently discovered environmental hazard. Opinions may be widely different about the distribution of risks across the population. We study financial markets that suffice to reach efficient allocations in this situation....

We propose a model of price formation in which the trading price varies only if the value of the information signal is large enough to guarantee a profit in excess of transaction costs. Using transaction data only, we extract: (i) the conditional volatility of the underlying security, which is...

I analyze how the introduction of financial frictions can affect the trade-off between output stabilization and inflation stability and whether, in the presence of financial frictions, the optimal outcome can be realized or approached more closely if monetary policy is allowed to react to...

This paper analyzes whether differences in institutional structures on capital markets contribute to explaining why some OECD-countries, in particular the Anglo-Saxon countries, have been much more successful over the last two decades in producing employment growth and in reducing unemployment...

In a production economy with trade in financial markets motivated by the desire to share labor-income risk and to speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk premium, and reduces welfare. Regulatory measures, such as...

Many researchers have recommended to increase public debt in the aftermath of the financial crisis in order to relax borrowing constraints for private households. This advice is based on the common assumption that borrowing conditions of private agents are exogenous to public policy. We study...

We introduce a leverage-constrained financial intermediaries and market incompleteness into a three-period pure exchange economy with ex ante homogeneous households. Market incompleteness generates ex post heterogeneity in households' consumption and wealth distributions and arbitrage...

A model of mortgage defaults is built into the standard incomplete markets model. Households face income and house-price shocks and purchase houses using long-term mortgages. Interest rates on mortgages are determined in equilibrium according to the risk of default. The model accounts for the...