| Summary: | The proposed thesis comprises three essays on the design of financial securities in the presence of frictions. The first essay develops a dynamic model of the impact of security designs on investment behavior and examines the adverse incentives created by debt and by equity when information is ex ante symmetric, inside agents cannot engage in perquisite consumption, and when there are no corporate taxes. A dynamic precommitment equilibrium is constructed and the choice between using risky debt and equity to raise capital is investigated. The second essay extends the above dynamic precommitment equilibrium approach to examine the behavior of the term structure of risky debt and characterizes the agency cost of adverse incentives as a spread. Assuming a fixed economic life of assets, the optimal maturity for debt is then investigated. The third essay develops a general equilibrium stochastic volatility framework and seeks to understand the structure of volatility risk. With a notion to develop tools to manage such risk, it considers the proper specification of the volatility of stocks, and the valuation of options written directly on this volatility.
|
|---|
