Central counterparties (CCPs) are becoming central to over-the-counter (OTC) markets. A CCP limits counterparty risk but raises entry barriers. We analyze the trade-off between dealers' equilibrium default risk and competition in an OTC market with imperfect competition and endogenous default...

Standard Gaussian macro-finance term structure models impose the Markov property: the conditional mean is a function of the risk factors. We relax this assumption parsimoniously, and consider models where yields are linear in the conditional mean (but not in the risk factors). To illustrate, if...

Interest rate forecasting remains vexing because of the lower bound. A few tractable models are available, but they offer limited or restrictive volatility dynamics. In response, we build on the popular dynamic Nelson-Siegel approach to greatly expand the space of term-structure models that are...

An emerging literature relies on an index of limits of arbitrage in fixed-income markets. We analyze the benefits of an index that is model-free, robust and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross-section of returns. Trading...

Cochrane and Piazzesi (2005) show that (i) lagged forward rates help predict bond returns and that (ii) modern Markovian dynamic term structure models (DTSMs) cannot match the evidence. We develop the family of Conditional Mean DTSMs where the dynamics depend on current yields and their history...

Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increase the accuracy of model out-of-sample forecasts for the level and...

We find strong evidence of a funding risk premium in the cross-section of asset returns. Our estimate for the price of funding risk is robust across Treasury bonds, corporate bonds, equities, and hedge funds. Funding shocks pose a risk to investors because they exacerbate the illiquidity and...

Expected returns vary when investors face time-varying investment opportunities. In theory, structural long-run risk models (Bansal and Yaron, 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton, 2000) emphasize sources of risk that are not observable to the econometrician. We show...

Macro news have large impact on bond yields in high-frequency data. We aggregate the impact of macro news within each month, which we use in a no-arbitrage term structure models. We find that macro news explain 50 percent in the term premium of the 10-year bond at the monthly frequency and 40...

We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk...