We identify a class of term structure models possessing a generalized affine-structure that significantly extends the class studied by Duffie, Pan, and Singleton (2000) and Chacko and Das (2002). This class of models, which includes bothinfinite-state-variable (i.e., HJM-type) and...

We propose a canonical representation for affine term structure models where the state vector is comprised of the first few Taylor-series components of the yield curve and their quadratic (co-)variations. With this representation: (i) the state variables have simple physical interpretations such...

Previous research (e.g., Lando (1998), Duffie, Schroder and Skiadas (1996), Duffie and Singleton (1999)) has shown that under a suitable no-jump condition, the price of a defaultable security is equal to its risk-neutral expected discounted cash flows if a modified discount rate is introduced to...

Several recent papers document significant relative mis-pricings between caps and swaptions using traditional multi-factor models of the term structure. Below we argue that these mis-pricings are due to the severe restrictions that traditional models place on the joint evolution of the i) term...

Most models of the term structure are restrictive in that they assume the bond market forms a complete market. That is, they assume all sources of risk affecting fixed income derivatives can be completely hedged by a portfolio consisting solely of bonds. Below, we present empirical evidence...

We propose a very fast and accurate algorithm for pricing swaptions when the underlying term structure dynamics are affine. The efficiency of the algorithm stems from the fact that the moments of the underlying asset (i.e., a coupon bond) possess simple closed-form solutions. These moments...

Most term structure models with stochastic volatility are restrictive in that they assume the risk in derivative securities can be perfectly hedged by a portfolio consisting solely of bonds. Below, we demonstrate that this prediction fails in practice. In particular, we find that the changes in...

Using straight industrial bonds with quoted prices, we investigate the determinants of credit spread changes. We find the variables that should in theory determine credit spread changes in fact have limited explanatory power. Further, the residuals from this first-pass regression are highly...

In contrast to the empirical findings of Helwege and Turner (1998), existing structural models of default predict that the term structure of credit spreads is downward sloping for speculative-grade debt. We demonstrate that this prediction is a consequence of the assumption that the default...

We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 options and tranche spreads on the five-year CDX index. We demonstrate the importance of calibrating the model to match the entire term structure of CDX index spreads because it...