As observed in the financial crisis, CDS spreads tend to increase simutaneously as a reaction to common shocks. Focusing on the spillover effects triggered by extreme events, we propose a credit risk analysis tool by applying credit default swap spread returns to the concept of 4CoVaR suggested...

We show that if sophisticated institutional managers and individual investors perceive tail-risks differently, then a new explanation for the pricing kernel puzzle emerges. We show, by example, that even a tiny difference in tail-risk perception by the two investor types can explain the pricing...

The research investigated the concept of equity being more expensive than credit due to its subordination in the capital structure and the shared probabilistic outcome of a credit default event. Using a unique application of the Merton (1974) model, a relative valuation framework is proposed...

We propose a class of time-separable and state-dependent preferences for asset pricing. In conjunction with the affine structure of the joint dynamics of state variables, aggregate consumption and dividend, an equilibrium model with these preferences yields closed-form solutions of bonds and...

State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general f ramework...

Recent work uses option prices to derive lower bounds for the risk premia of the market portfolio and individual stocks. We test the bounds conditionally. We cannot reject that they are valid, but we do reject that they are tight. Using the market bounds as forecasts appears unreasonable in many...

The use of futures exchange contracts instead of forwards completes the maturityspectrum of the correlation between the spot yield and the premium. We find that theforward premium puzzle (FPP) depends significantly on the maturity horizon of thefutures contract and the choice of the sampling...

Past literature has shown that continuous time affine credit risk pricing models have appealing counterparts in discrete time, namely ARG and VARG0 models based on autoregressive Gamma processes that need no Feller conditions. This paper clarifies that ARG and VARG0 models are part of a wider...

We find that interest rate variance risk premium (IRVRP) - the difference between implied and realized variances of interest rates - is a strong predictor of U.S. Treasury bond returns of maturities ranging between one and ten years for return horizons up to six months. IRVRP is not subsumed by...