We test the efficiency of the US Treasury market by comparing the performance of two yield-spread mean-reverting trades, a 'riding the yield curve' trade and a comparable strategy in the S&P Index. From 1969 to 2000, 'riding the yield curve' and the S&P index are approximately equidistant from...

A binomial approximation to a diffusion is defined as " computationally simple" if the number of nodes grows at most linearly in the number of time intervals. It is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial...

This article develops and estimates a dynamic arbitrage-free model of the current forward curve as the sum of (i) an unconditional component, (ii) a maturity-specific component and (iii) a date-specific component. The model combines features of the Preferred Habitat model, the Expectations...

A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading...

We test the theory of the term structure of indexed-bond prices due to Cox, Ingersoll, and Ross (CIR). The econometric method uses Hansen's generalized method of moments and exploits the probability distribution of the single-state variable in CIR's model, thus avoiding the use of aggregate...

We develop contingent claims valuation models for corporate bonds that are capable of generating yield spreads consistent with the levels observed in practice. We incorporate important features in the valuation related to the occurrence of and payoff upon bankruptcy and focus on the default risk...

A framework for valuing floating rate notes is developed and used to examine the effects of (1) lags in the coupon averaging formula, (2) special contractual features and (3) default risk. Evidence on a sample of U.S. floaters is presented and indicates that these notes sold at significant...

This study examines intraday transaction data for S&P 500 stock index futures prices and the intraday quotes for the underlying index. The data indicate that the futures price changes are uncorrelated, and that the variability of these price changes exceeds the variability of price changes in...