We investigate the influence of various fundamental variables on a cross-section of credit default swap transaction data. Credit default swap rates can be seen as a superior proxy to credit risk than bond spreads are. Because we have transaction prices rather than quotes, we have thus...

We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price density (SPD) of bond prices shortly before and after the announcements. We find that the announcements...

This paper introduces a general framework for market models, named Market Model Approach, through the concept of admissible sets of for-ward swap rates spanning a given tenor structure. We relate this concept to results in graph theory by showing that a set is admissible if and only if the...

A few recent papers have derived estimates of the representative agent's risk aversion by comparing the statistical density of asset returns and the state-price density. The implied risk aversion estimates obtained in these studies are puzzling, exhibiting (i) pronounced U-shaped patterns (a...

Market prices of corporate bond spreads and of credit default swap (CDS) rates do not match each other. In this paper, we argue that the liquidity premium, the cheapest-to-deliver (CTD) option and actual market segmentation explain the pricing differences. Using the European transaction data...

We develop a simple binomial model of liquidity and credit risk in which a bondholder has the option to time the sale of his security, given a distribution of potential buyers, bids and liquidity shocks. We examine first the case without default and find that our model predicts decreasing term...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However in most situations, corporate executives face incomplete markets either because they receive compensation packages...

We introduce Indirect Robust Generalized Method of Moments (IRGMM), a new simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it...

We develop a general equilibrium model of a production economy which has a risky production technology as well as a growth option to expand the scale of the productive sector of the economy. We show that when confronted with growth options, the representative consumer may sharply alter...

We present a model in which a sovereign country optimally decides on its consumption and investment policies as well as on the optimal time to default. In the paper we allow the sovereign borrower to keep the fraction of its augmented wealth in so-called international reserves. We further assume...