Demand is growing for a better understanding of how assets are priced in countries outside of the U.S.While financial data are available for many firms world-wide, it is important to have a reliable andreplicable method of constructing high-quality systematic risk factors from these data. This...

This paper reveals that the class of affine term structure models introduced by Duffie and Kan (1996) is much larger than it has been usually considered in the literature. We study "fundamental" risk factors, which represent multivariate risk aversion of the consumer volatility matrix of the...

The challenge of international term structure models is to simultaneously account for the properties of interest rate term structures and foreign exchange rates within an arbitrage-free framework. We extend the quadratic term structure models proposed in Leippold and Wu (2002) to multiple...

We study the optimal policies and mean-variance frontiers (MVF) of a multiperiod mean-variance optimization of assets and liabilities (AL). Our model allows for a contemporaneous optimization of the balance-sheet as a whole. This makes the analysis more challenging than in a setting based on...

We propose an affine term structure model which accommodates non-linearities in the drift and volatility function of the short-term interest rate. Such non-linearities are a consequence of discrete beta-distributed regime shifts constructed on multiple thresholds. We derive iterative closed form...

We identify local and global factors across international bond markets that arepoorly spanned by the traditional level, slope and curvature factors but havestrong forecasting power for future bond excess returns. Local and global fac-tors are jointly signicant predictors of bond returns, where...

This paper develops a new estimation procedure for characteristic-based factor models of security returns. We treat the factor model as a weighted additive nonparametric regression model, with the factor returns serving as time-varying weights, and a set of univariate non-parametric functions...

Under the assumption of normally distributed returns, we analyzewhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)is consistent with the Capital Asset Pricing Model. We find that in everyfinancial market equilibrium the Security Market Line Theorem holds.However, under the...

Central bankers’ conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should bedecreased to attain this goal. Real interest rates,...

Stylized facts on output and interest rates in the U.S. have so far proved hard to match with business cycle models. But these findings do not acknowledge that the economy might well be driven by different shocks, and by each in different ways. I estimate covariances of output, nominal and real...