The main goal of this paper is to better understand the behavior of credit spreads in the past and the potential risk of unexpected future credit spread changes. One important consideration to note regarding credit spreads is the fact that bond spreads contain a liquidity premium, which...

From the early 1960s onwards, Arnold Zellner has been publishing papers in the areas of statistical theory, econometric applications and macroeconomic modelling. This conversation canvasses Zellner's transition from physics to economics, the reason for the renewal of interest in Bayes's theorem...

Traditional portfolio optimization models specify placement of capital as rather irrevocably and fully at risk through investment horizon(s) or continuously. Under this constraint, asset class allocation typically serves as primary mode of diversification, pursuing risk moderation by seeking to...

From the painful unwinding of the S&L crisis to the onset of the most recent recession, equity and bond-friendly secular declines in interest and inflation rates gave the investing masses license to stretch Markowitz's Modern Portfolio Theory beyond its contextual foundations and to extrapolate...

Hedging of illiquid financial instruments is carried out with liquid instruments that, as a rule, have simpler payoff functions. For example, hedging of Asian or long-dated put options is carried out with vanilla puts, hedging of Bermuda swaptions is done with vanilla swaptions, etc. This kind...

The Ohlson (1995) equity valuation and returns models are consistent with mathematical formulation. Since value relevance models that relate Ohlson (1995) focus on information dynamics of accounting and other information for explaining equity value, an inconsistency between Ohlson's (1995)...

This paper examines the rise of the VAR (Vector AutoRegressive) approach from a historical perspective. It shows that the VAR approach arises from a fusion of the Cowles Commission tradition and time series statistical methods, catalysed by the rational expectations (RE) movement, that the...

We develop an empirically highly accurate discrete-time daily stochastic volatility model that explicitly distinguishes between the jump and continuous-time components of price movements using nonparametric realized variation and Bipower variation measures constructed from high-frequency...