Efficiency, equilibrium, and asset pricing with risk of default

@article{lvarez2000EfficiencyEA,
  title={Efficiency, equilibrium, and asset pricing with risk of default},
  author={Fernando {\'A}lvarez and Urban J. Jermann},
  journal={Econometrica},
  year={2000},
  volume={68},
  pages={775-797}
}
We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the… 
Capital Requirements and Asset Prices
We consider a pure-exchange general equilibrium economy populated by investors with heterogeneous preferences and beliefs. The investors receive labor incomes, which are not fully pledgeable, and can
Quantitative Asset Pricing Implications of Endogenous Solvency Constraints
We study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. We present a simple example for which efficient
Risk-Sharing, Investment, and Asset Prices According to Cournot and Arrow-Debreu
We study the macroeconomic consequences of financial market concentration in a complete markets economy with production. We propose a theory in which differences in preferences, productivity, and
Asset and Derivative Pricing with Incomplete Markets
This paper presents a model where uninsurable income shocks and credit constraints generate a demand for liquidity. Infinitely lived agents purchase a risky asset to self insure themselves against
Collateral Constraints and Asset Prices
Abstract We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints
Endogenous borrowing constraints and default when markets are incomplete
Incomplete markets and non-default borrowing constraints increase the volatility of pricing kernels and are helpful when addressing assetpricing puzzles. However, ruling out default when markets are
Asset Pricing and Risk Sharing with Limited Enforcement and Heterogeneous Preferences
We introduce heterogeneous preferences (heterogeneity in risk aversion and time discount factor) into a two-agent endowment economy with enforcement constraints, aggregate and idiosyncratic
A Model of Credit Risk, Optimal Policies, and Asset Prices
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
...
...

References

SHOWING 1-10 OF 13 REFERENCES
Market Frictions and Consumption-Based Asset Pricing
A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research,
Quantitative Asset Pricing Implications of Endogenous Solvency Constraints
We study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. We present a simple example for which efficient
Debt-Constrained Asset Markets
We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults
Rational asset pricing bubbles
This paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework. Our main
Asset Pricing with Heterogeneous Consumers
Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks.
Infinite Horizon Incomplete Markets
This paper extends the general equilibrium model with incomplete markets to an open-ended future, thereby providing a natural setting for analyzing problems in macroeconomics. Two concepts of
Endogenous Borrowing Constraints with Incomplete Markets
This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. The authors allow the constraints to depend on an investor's
...
...