[In this article we construct a model in which a consumer's utility depends on the consumption history. We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closed form in this general equilibrium setting to rationalize the observed stickiness of the consumption series relative to the fluctuations in stock market wealth. The sample paths of consumption generated from this model imply lower variability in consumption growth rates compared to those generated by models with separable utility functions. We then present a partial equilibrium model similar to Merton (1969, 1971) and extend Merton's results on optimal consumption and portfolio rules to accommodate nonseparability in preferences. Asset pricing implications of our framework are briefly explored.]

[Financial institutions around the world expected the millennium date change (Y2K) to cause an aggregate liquidity shortage. Responding to the concern, the Federal Reserve Bank of New York auctioned Y2K options to primary dealers. The options gave the dealers the right to borrow from the Fed at a predetermined interest rate. Using the implied volatilities of Y2K options and the on/off-the-run spread, we demonstrate that the Fed's action eased the fears of bond dealers, contributing to a drop in the liquidity premium of Treasury securities. Our analysis shows the link between the microstructure of government debt markets and the central bank's provision of liquidity. We argue that Y2K options and their effects on liquidity premium broadly conform to the economic theory on public provision of private liquidity.]

[We provide a simple binomial framework to value American-style derivatives subject to trading restrictions. The optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative. No-short-sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk-neutralized process for the underlying asset. One consequence is that American call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends. Applications to executive stock options (ESO) are presented: it is shown that the value of an ESO could be substantially lower than that computed using the Black-Scholes model. We also analyze nontraded payoffs based on a price that is imperfectly correlated with the price of a traded asset.]

We provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula. In turn, we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations. Our model provides an explicit valuation formula for a stylized defined benefits plan. The optimal asset allocation policies consist of the replicating portfolio of the pension liabilities and the growth optimum portfolio independent of the pension liabilities. We show that the worker will retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate. Using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions.

The valuation of debt and equity, reorganization boundaries, and firm's optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. We study the effects of bond covenants on payout policies and distinguish liquidity-induced defaults from strategic defaults. We derive optimal equity issuance and payout policies. The debt capacity of the firm and the optimal capital structure are characterized.

[This article studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. We incorporate some insights of the recent corporate finance literature into a valuation framework. The basic framework is an extensive form game determined by the terms of a debt contract and applicable bankruptcy laws. Debtholders and equityholders behave noncooperatively. The firm's reorganization boundary is determined endogenously. Strategic debt service results in significantly higher default premia at even small liquidation costs. Deviations from absolute priority and forced liquidations occur along the equilibrium path. The design tends to stress higher coupons and sinking funds when firms have a higher cash payout ratio.]

Suresh Sundaresan, Futures Prices on Yields, Forward Prices, and Implied Forward Prices from Term Structure, The Journal of Financial and Quantitative Analysis, Vol. 26, No. 3 (Sep., 1991), pp. 409-424

In this article we construct a model in which a consumer's utility depends on the consumption history. We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closed form in this general equilibrium setting to rationalize the observed stickiness of the consumption series relative to the fluctuations in stock market wealth. The sample paths of consumption generated from this model imply lower variability in consumption growth rates compared to those generated by models with separable utility functions. We then present partial equilibrium model similar to Merton (1969, 1971) and extend Merton's results on optimal consumption and portfolio rules to accommodate nonseparability in preferences. Asset pricing implications of our framework are briefly explored.

[Using data on repurchase agreements by primary securities dealers, we show that three classes of securities (Treasury securities, securities issued by government-sponsored agencies, and mortgage-backed securities) can be formally ranked in terms of their collateral values in the general collateral (GC) market. We then show that GC repurchase agreement (repo) spreads across asset classes display jumps and significant temporal variation, especially at times of predictable liquidity needs, consistent with the "safe haven" properties of Treasury securities: These jumps are driven almost entirely by the behavior of the GC repo rates of Treasury securities. Estimating the "collateral rents" earned by owners of these securities, we find such rents to be sizable for Treasury securities and nearly zero for agency and mortgage-backed securities. Finally, we link collateral values to asset prices in a simple no-arbitrage framework and show that variations in collateral values explain a significant fraction of changes in short-term yield spreads but not those of longer-term spreads.Our results point to securities' role as collateral as a promising direction of research to improve understanding of the pricing of money market securities and their spreads.]

We provide a framework in which we link the valuation and asset allocation policies of defined benefits plans with the lifetime marginal productivity schedule of the worker and the pension plan formula. In turn, we examine the retirement policies that are implied by the primitives of the model and the value of pension obligations. Our model provides an explicit valuation formula for a stylized defined benefits plan. The optimal asset allocation policies consist of the replicating portfolio independent of the pension liabilities. We show that the worker with retire when the ratio of pension benefits to current wages reaches a critical value which depends on the parameters of the pension plan and the discount rate. Using numerical techniques we analyze the feedback effect of retirement policies on the valuation of plans and on the asset allocation decisions.