An asset manager trades off the benefits of higher leverage against the costs of adjusting leverage in order to mitigate expected insolvency losses. We explicitly calculate optimal dynamic incentive-compatible leverage policies in simple versions of this problem

We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on...

We provide an approach to the market valuation of deposit insurance that is based on reduced-form methods for the pricing of fixed-income securities under default risk. By reference to bank debt prices as well as qualitative-response models of the probability of bank failure, we suggest how a...

Turmoil in financial markets is often accompanied by a significant decrease in market liquidity. Here, we investigate how such key risk measures as likelihood of insolvency, value at risk, and expected tail loss respond to bid-ask spreads that are likely to widen just when positions must be...

We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar-denominated bonds. We consider the determinants of...

We provide the definition and a complete characterization of regular affine processes. This type of process unifies the concepts of continuousstate branching processes with immigration and Ornstein-Uhlenbeck type processes. We show, and provide foundations for, a wide range of financial...

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are difficult to locate, then the price of the security is initially elevated, and expected to decline over time....

We examine the term structure of yield spreads between floating-rate and fixed-rate notes of the same credit quality and maturity. Floating-fixed spreads are theoretically characterized in some practical cases and quantified in a simple model in terms of maturity, credit quality, yield...

In this discussion of risk analysis and market valuation of collateralized debt obligations, we illustrate the effects of correlation and prioritization on valuation and discuss the quot;diversity scorequot; (a measure of the risk of the CDO collateral pool that has been used for CDO risk...

This paper presents convenient reduced-form models of the valuation of contingent claims subject to default. A distinguishing feature of our approach is that losses at default are parameterized in terms of the fractional loss in market value. Under this assumption, and the assumption that...