Spreads of agency mortgage-backed securities (MBS) vary significantly in the cross section and over time, but the sources of this variation are not well understood. We document that, in the cross section, MBS spreads adjusted for the prepayment option show a pronounced smile with respect to the...

A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model,...

Does the selection of a specific interest rate model to use for pricing, hedging, and risk-return analysis depend upon whether the user is a buy-side institution or a sell-side dealer bank? Sanjay Nawalkha and Riccardo Rebonato debate this question in this paper and provide some insightful...

This paper examines the effects of liquidity during the 2007-09 crisis, focussing on the senior tranche of the CDX.NA.IG Index and on Moody's AAA Corporate Bond Index. The aim is to understand whether these senior credit indices were discounted below fair value and to what extent this discount...

A growing body of literature confirms the significance of the commodity futures basis factor: It has a significantly positive premium and it explains the cross-section of commodity-futures excess returns. We extend the literature by documenting predictive relation between this factor and the...

Term premiums, defined as the excess return of long-dated contracts over short-dated contracts, in commodity futures are strongly predictable, both in the time series and in the cross section, by roll yield spreads. Strategies that exploit this predictability show sizable Sharpe ratios and are...

We derive expected bond return equations for various structural credit valuation models with alternative stochastic processes and boundary conditions for default given in Merton [1974], Merton [1976], Black and Cox [1976], Heston [1993], Longstaff and Schwartz [1995], and Collin-Dufresne and...

We consider the risk neutral valuation of fixed term securities lending in a multi-curve framework, taking into account the forward basis of each component of the transaction relative to the discount curve, including basis between currencies. We show that a convexity adjustment arises from the...

By simultaneously using dividend and variance swap data, we show how the term structure of the equity risk premium varies over time and how its shape is affected by liquidity risk premia. The term structure is always positively sloped, while funding liquidity premia and betas explain the high...

The Gaussian affine interest rate models are widely used in the financial industry for pricing, hedging and also risk management purposes. We consider the multifactor models with time dependent parameters. Usually the models are simulated using some appropriate discretization schema because the...