Models based on asymmetric information predict that debt is least sensitive to private information and cannot explain the illiquidity of corporate debt in secondary markets. We analyze security design with moral hazard and offer a new explanation. First, the optimal compensation contract creates incentives for the manager to engage in risk-shifting, making her interests congruent with those of ...

We establish the existence of minimizers in a rather general setting of dynamic stochastic optimization without assuming either convexity or coercivity of the objective function. We apply this to prove the existence of optimal portfolios for non-concave utility maximization problems in financial market models with frictions (such as illiquidity), a first result of its kind. The proofs are based...

Traditional betas refer to the sensitivity of returns to traditional securities, such as stocks, bonds and cash. Alternative betas represent sensitivity to other systematic market factors, such as credit spreads, higher yielding or ‘carry’ currencies, volatility, illiquidity, and other potential return sources (Exhibit 1). ‘Alpha’ is often synonymous with manager skill, but perhaps is better th...

We present a model of the propagation process of bank runs. A bank failure alone is not sufficient to trigger a panic. In accord with the empirical evidence, runs become contagious only during periods of macroeconomic instability. In addition, we make a clear distinction between illiquidity and insolvency as possible causes of bank failures. We also show that, despite the possibility of runs, t...