The He and Krishnamurthy models imply that the financial intermediary sector – measured broadly, and not just focused for example on hedge funds – has leverage that rises during crisis. The prediction is due to a mix of general equilibrium and corporate finance arguments. First, in the model, in general equilibrium the intermediary sector must retains the bulk of risk exposure from intermediate...

A home is the single largest purchase that most households make, and it is one that usually requires some debt financing. Because housing debt is such a large component of households’ balance sheets, it is important to understand the financing decision. In this paper, we use household level data from the HILDA survey to relate households’ leverage to their observed characteristics using both gr...

Optimal Transport has recently gained interest in machine learning for applications ranging from domain adaptation, sentence similarities to deep learning. Yet, its ability to capture frequently occurring structure beyond the “ground metric” is limited. In this work, we develop a nonlinear generalization of (discrete) optimal transport that is able to reflect much additional structure. We demon...

In this paper we examine an optimal investment policy of the firm, which is financed by issuing equity and debt during a period of time, using real options framework. We examine the effects of the maturity of investment on the values of equity, debt, firm, tax shield and bankruptcy cost. Specifically, we show that the investment timing depends not only on the investment threshold but also on th...

Most capital structure models assume that the decision of how much debt to issue is a static choice. In practice, however, firms adjust outstanding debt levels in response to changes in firm value. In this article, we solve for the optimal dynamic capital strategy of a firm and investigate the implications for optimal leverage ratios and the magnitude of the tax benefits to debt. Below, we cons...