Three essays on the optimal allocation of risk with illiquidity, intergenerational sharing and systemic institutions

This thesis considers three non-trivial problems of risk allocation, applying approaches from theoretical finance and risk management to address several policy debates from a macro-finance point of view.
The first essay addresses a classical finance problem of allocating risks efficiently in an investment portfolio. In our set-up, illiquidity in one of the assets exists as uncertainty in the immediate availability of a market where price risk can be traded. As a result, illiquidity acts as an additional non-hedgeable risk component, affecting the portfolio choice decision.
The second essay puts the allocation problem into a policy-relevant setting by considering how illiquidity in the form of uncertain trading costs affects the ability of different generations to share financial risk with each other. A policymaker balances, on one hand, the benefits of a wider risk-bearing pool by integrating the young into the financial shock affecting the elderly, and on the other, the costs of potentially destabilizing the young's retirement savings.
The third essay shows how monitoring and evaluating systemic risk can be done through a risk management lens. The supervisor implicitly owns a portfolio of defaultable loans corresponding to the liabilities of financial institutions, and needs to manage the tail risk of the portfolio. We, thus, propose a credit portfolio approach for evaluating systemic risk and attributing it across institutions by constructing a model that can be estimated from high-frequency CDS data.