The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers...

We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, over-indebted mortgagors could free up income to pay the mortgage by filing bankruptcy and having their unsecured debts discharged. BAR blocks that...

Are companies with traded credit default swap (CDS) positions on their debt more likely to default? Using a proportional hazard model of bankruptcy and Merton's contingent claims approach, we estimate the probability of default for US nonfinancial firms. Our analysis does not generally find a...

Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner's problem and show that the market equilibrium is constrained inefficient,...

With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near-universe of modern business cycles. We...

We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this...

Increasing personal bankruptcy protection raises consumers' desire to borrow and lenders' cost of extending credit; the impact on equilibrium borrowing is ambiguous. Using bankruptcy protection changes between 1999 and 2005 across U.S. states, we find that borrowers respond to greater protection...

In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, eliciting responses from financial intermediaries who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is...

This paper examines the effects of the Federal Reserve’s Term Auction Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association...

We show how to price the time series and cross section of zero coupon bonds via ordinary least squares regressions. Our approach allows computationally fast estimation of term structure models with a large number of pricing factors. Even though we do not impose cross-equation restrictions in the...