Default risk and equilibrium asset pricing: Applications to corporate and sovereign debt markets

Default risk affects many consumers in our economy and causes a special imperfection for the financial market. In this thesis I investigate how the existence of default risk affects the equilibrium of the economy, the agent's optimal strategy, and asset prices. A theoretical framework has been developed to simultaneously determine the agent's optimal consumption policy and optimal default policy under credit risk. Using this modeling strategy, I study three problems involving default risk: equilibrium asset pricing, sovereign borrowing and lending, and corporate optimal dividend policy.