This paper sheds new light on higher-order price risks in crude oil markets. A model-free analysis reveals that crude oil variance risk behaves fundamentally different from variance risk in equity markets. Most importantly, a skewness swap is no valid hedge for a variance swap and investors fear large price jumps in both directions. A model-based assessment confirms this and reveals that while stochastic volatility is important to capture the statistical properties such as volatility clusters and time-varying variance swap rates, only jump risk seems to be priced with a premium. Empirical evidence from a pricing and hedging exercise confirms these findings.

We analyze the impact of market frictions on the trading volume and liquidity premia of finite-maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

We investigate the term structure of bond market illiquidity premia and show that the term structure varies greatly over time. Short and long end are strictly separated suggesting that different economic factors drive different parts of the term structure. We propose a stylized theoretical model which implies that current trading needs of investors determine the short end. The long-term risk of being forced to liquidate bond positions determines the long end. Empirical evidence supports these predictions. While short-term liquidation risk captured by asset market volatilities drives the short end, the long end depends on the long-term economic outlook.

Our main goal is to investigate the question of which interest‐rate options valuation models are better suited to support the management of interest‐rate risk. We use the German market to test seven spot‐rate and forward‐rate models with one and two factors for interest‐rate warrants for the period from 1990 to 1993. We identify a one‐factor forward‐rate model and two spot‐rate models with two factors that are not significantly outperformed by any of the other four models. Further rankings are possible if additional criteria are applied.