We embed systematic default, procyclic recovery rates and habit persistance into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to the...

Starting from the discrete-time affine term structure model by Dai, Le & Singleton (2006), this paper proposes a Radon-Nikodym derivative which implies that factors follow a mixture distribution under the physical measure. The model thus maintains attractive features of an affine relation...

We develop a new parametric estimation procedure for option panels observed with error which relies on asymptotic approximations assuming an ever increasing set of observed option prices in the moneyness-maturity (cross-sectional) dimension, but with a fixed time span. We develop consistent...

Illiquidity is well-known to be a significant determinant of stock and bond returns. We report on illiquidity premia in the equity options market. An increase in option illiquidity decreases the current option price and implies higher expected option returns. This effect is statistically and...

This paper shows that the consumption-based asset pricing model (C-CAPM) with low-probability disaster risk rationalizes large pricing errors, i.e. Euler equation errors. This result is remarkable, since Lettau and Ludvigson (2009) show that leading asset pricing models cannot explain sizeable...

We characterize diversification in corporate credit using a new class of dynamic copula models which can capture dynamic dependence and asymmetry in large samples of firms. We also document important differences between credit spread and equity return dependence dynamics. Modeling a decade of...

We investigate the long-run stock-bond correlation using a novel model that combines the dynamic conditional correlation model with the mixed-data sampling approach. The long-run correlation is affected by both macro-finance variables (historical and forecasts) and the lagged realized...

We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the...

This paper adopts quantile regressions to scrutinize the realized stock-bond correlation based upon high frequency returns. The paper provides in-sample and out-of-sample analysis and considers a large number of macro-?nance predictors well-know from the return predictability literature. Strong...

International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that copula correlations have...