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We study the robust regulation of contracts in moral hazard problems. A firm offers a contract to incentivise a worker protected by limited liability. A regulator restricts the set of permissible contracts to (i) improve efficiency and (ii)…
This paper analyzes the timing options embedded in a startup firm, and the associated market entry and exit timing decisions under the exogenous risks of early termination and competitor's entry. Our valuation approach leads to the…
Adapting a simple biological model, we study the effects of control on the market. Companies are depicted as sites on a lattice and labelled by a fitness parameter (some `company-size' indicator). The chance of survival of a company on the…
Credit capital requirements in Internal Rating Based approaches require the calibration of two key parameters: the probability of default and the loss-given-default. This letter considers the uncertainty about these two parameters and…
We examine how career concerns influence the behavior and mobility of financial advisers. Drawing on a uniquely comprehensive matched panel that combines employer-employee data with a longstanding national ranking, our study tests…
In regulatory proceedings, few issues are more hotly debated than the cost of capital. This article formalises the theoretical foundation of cost of capital estimation for regulatory purposes. Several common regulatory practices lack a…
We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The…
Dynamical systems with components whose sizes evolve according to multiplicative stochastic rules have been recently combined with entry and exit processes. We show that the assumptions usually made in modeling exits are at odds with the…
The implementation of a supervision and incentive process for identical workers may lead to wage variance that stems from employer and employee optimization. The harder it is to assess the nature of the labor output, the more important such…
The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for…
This paper examines how regulatory interventions in high-frequency financial markets affect price discovery. We focus on Breaking news, where dynamic circuit breakers trigger trading halts immediately after the release of macroeconomic…
Value-at-Risk (VaR) is an institutional measure of risk favored by financial regulators. VaR may be interpreted as a quantile of future portfolio values conditional on the information available, where the most common quantile used is 95%.…
Against the widely held belief that diversification at banking institutions contributes to the stability of the financial system, Wagner (2010) found that diversification actually makes systemic crisis more likely. While it is true, as…
An employer contracts with a worker to incentivize efforts whose productivity depends on ability; the worker then enters a market that pays him contingent on ability evaluation. With non-additive monitoring technology, the interdependence…
Protection of creditors is a key objective of financial regulation. Where the protection needs are high, i.e., in banking and insurance, regulatory solvency requirements are an instrument to prevent that creditors incur losses on their…
The importance of the global financial system cannot be exaggerated. When a large financial institution becomes problematic and is bailed out, that bank is often claimed as "too big to fail". On the other hand, to prevent bank's failure,…
In a market system, regulations are designed to prevent or rectify market failures that inhibit fair exchange, such as monopoly or transactions with hidden costs. Because regulations reduce profits to those possessing unfair advantage,…
We study a dynamic labor market in which a risk-averse worker with career concerns chooses each period between self-employment, which generates publicly observed binary output, and employment at a firm, which pays a flat wage but keeps…
Nowadays, rating systems play a crucial role in the attraction of customers for different services. However, as it is difficult to detect a fake rating, attackers can potentially impact the rating's aggregated score unfairly. This malicious…
We study the impact of regulatory capital constraints on fire sales and financial stability in a large banking system using a mean field game model. In our model banks adjust their holdings of a risky asset via trading strategies with…