It is well known that shareholders in levered firms select more risky projects. Yet, Black and Scholes-Merton option pricing framework cannot explain these shareholders adverse risk incentives. Indeed, if they behave strategically they should always select infinite volatility projects. We...

In a continuous-time setting, we model the problem of sovereign borrowing. In our model, borrowing is used to generate exports. The sovereign borrower in our model is subject to two types of potential retaliatory actions from the lender in the event of default. First, the lender can capture a...

Derivatives have become an integral part of the major financial institutions' business and the global derivatives market has grown into the largest market in the world by far. As for any other contract, derivatives are subject to default risk. The set of mechanisms employed by traders to...

We examine time varying integration of developed (DM) and emerging (EM) market government bonds. Although we find an upward trend for most countries and maturity bands, we do observe reversals and negative trends among both DMs and EMs and for some maturities during the financial crisis. We...

In this study we examine the rationale behind informed traders decision to speculate on the volatility of the common stock by trading in the derivative or in the cash markets. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the...

This article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios. Similarly to Avramov, Kosowski, Naik, and Teo, we observe that, before accounting for the effect of liquidity risk, hedge fund portfolios that incorporate predictability in managerial skills...

In this study, we examine whether changes in the investment opportunity set stemming from interest rate and credit risks are priced in the US, the UK and the Swiss equity premia by estimating both two-factor and three-factor versions of Merton's ICAPM. We also study the degree of dependence and...

In this paper, we propose to study a hedge funds allocation problem. A typical feature of those alternative investments vehicles is their propensity to cease their activity after experiencing a distressing situation. We use an expected utility framework to integrate the hedge funds survival...

This study examines the effects on the stock market unitary risk premium and volatility associated with the listing of stock and stock index derivatives in Switzerland. Based on a univariate GARCH (1,1) specification of the stock index variance and a time-varying unitary risk premium...