The biggest and most well-known unsolved problem in academic finance is famously referred to as the Equity Premium Puzzle. It refers to the unexplained phenomenon that for over 100 years the average return on a well-diversified portfolio of equities has far outperformed that of risk-free,...

I document that higher debt-to-GDP ratio: (i) predicts higher excess stock returns with 30% five-year out-of-sample R-squared; (ii) correlates with higher credit risk premia in corporate bond excess returns and yield spreads; (iii) is associated with lower real risk-free rates and expected returns...

Expectations of risky bond payments are unobservable and recovery rates for sovereigns are hard to estimate because they have no contractual claims to defined assets and samples of defaults are limited. A geometric version of credit spread is used to derive expected payments, dependent on...

Fleckenstein et al. (2014) document that nominal Treasuries trade at higher prices than inflation-swapped indexed bonds, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation-indexed bonds (TIPS) and inflation swaps. Using US...

Fleckenstein et al. (2014) document that nominal Treasuries trade at higher prices than inflation-swapped indexed bonds, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation-indexed bonds (TIPS) and inflation swaps. Using US...

We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond...

We provide a model able to compute a threshold level for the public debt/GDP ratio, such that a country can be rescued by an official lender (e.g. ESM or IMF). The critical level is defined as the maximum level of debt/GDP, such that it is still possible to put the debt/GDP ratio on a...

We show that in both index-linked bond markets and inflation swap markets liquidity is an important determinant of prices. We do so by means of an asset pricing model with a liquidity risk factor and asset-specific liquidity characteristics. This liquidity risk factor is based on the measures of...

In this paper we analyse debt stabilization in a monetary union that features endogenous risk premia. In particular, we analyse debt stabilization in two diametrically opposed regimes. In the first regime, the "national fiscal discipline regime", financial markets impose sovereign risk premia...

This paper seeks to eliminate or reduce confusions about (related) key concepts such as the risk free rate, safe assets and sovereign risk in policy and academic discussions. A lack of consensus and confusions on how to define, measure and price “sovereign risk” is an important obstacle in...