The notion of asset market efficiency -- that market prices "fully reflect" all available information -- requires the operation of mechanisms that rapidly incorporate new information into asset prices. Particularly problematic -- both theoretically and empirically -- has been the case where new...

The goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification, in terms of a few primitive constructs, provides new and illuminating expressions for such key...

Evaluating default correlations and the probabilities of multiple defaults is an important task in credit analysis and risk management, but it has never been an easy one because default correlations cannot be measured directly. This paper provides, for the first time, an analytical formula for...

The goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification of the inverse, in terms of a few primitive constructs, helps clarify the determinants of such key...

If stock prices do not follow random walks, what processes do they follow? This question is important not only for forecasting purpose, but also for theoretical analyses and derivative pricing where a tractable model of the movement of underlying stock prices is needed. Although several models...

The existing structural models of credit risk have relied almost exclusively on diffusion processes to model the evolution of firm value. While a diffusion approach is convenient, it has produced very disappointing results in empirical application. Jones, Mason, and Rosenfeld (1984) find that...

We model the effects on banks of the introduction of a market for credit derivatives--in particular, credit default swaps. A bank can use such swaps to temporarily transfer credit risks of their loans to others, reducing the likelihood that defaulting loans would trigger the bank's financial...