We present a model of financial market liquidity provided by financially constrained intermediaries. We show that market liquidity increases with the level of intermediary capital. We also characterize conditions under which intermediaries play a stabilizing or destabilizing role in markets....

We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor...

In this paper we examine the dynamics of European sovereign bond yield spreads focusing on issues related to financial integration and market conditions. The finding of near-unit-root effects highlights the need for careful econometric specification. Thus we formulate sovereign bond yield...

Institutions such as the European Commission (EC) are currently seeking to increase the transparency of the derivatives markets. This course of action includes in particular the installation of a centralized clearing entity and with this the obligation to clear all relevant financial...

We propose an asset pricing model where preferences display generalized disappointment aversion (Routledge and Zin, 2009) and the endowment process involves long-run volatility risk. These preferences, which are embedded in the Epstein and Zin (1989) recursive utility framework, overweight...

For emerging market returns there is strong evidence that the departure from normality is primarily driven by kurtosis and not skewness. This paper investigates the empirical validity of a return generating process that includes quadratic and cubic market returns as factors of pricing for an...

We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the...

This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations...

Theory suggests that uninsurable income risk induces individuals to accumulate assets as a precautionary reserve of value. Most assets, however, bear rate of return risk, that can be diversified only if every asset is traded by a large number of individuals and arbitrage is frictionless. Using...

We study the problem of extracting the state price densities from the market prices of listed options. Adapting a model of Madan and Milne to a multiple expiration setting, we present an estimation method for the risk-neutral probability at a moving horizon of fixed length. With the exception of...