In this paper we study one fundamental tension between private equity fund and management in private equity-backed firms and show that capital structure (of private equity-back firms) is a mechanism to resolve the tension. The paper offers rationale for several characteristics of private equity...

During a financial crisis, when markets most need liquidity and arbitrage tradings, hedge funds often reduce their exposures and positions. The paper explains this phenomenon in light of coordination risk. We argue that the fragile nature of capital structure of hedge funds, combined with low...

We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business à la Minsky's narratives. They...

We develop a general equilibrium model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities. The mutual learning between financial markets and the real economy creates a strategic...