In this paper, we argue that the observed optimism in analysts' forecasts of earnings is related to the costs and benefits to analysts of issuing optimistic forecasts — when the costs of issuing an optimistic forecast are high relative to the benefits of doing so, optimism will be less...

We review the continuous-time literature on the so-called direct approach to bond option pricing. Going back to Ball and Torous (1983), this approach models bond price processes directly (i.e. without reference to interest rates or state variable processes) and applies methods that Black and...

This paper shows how financial contracts might be redesigned to allow for banks to manage the idiosyncratic component for their own accounts.

This paper develops a model and estimate simultaneously the joint dynamics of default-free and defaultable bond term structures.

Starting from the Merton framework for firm defaults, we provide theanalytics and robustness of the relationship between defaultprobabilities and default correlations. We show that loans with higherdefault probabilities will not only have higher variances but also highercorrelations with other...