When a firm writes incomplete debt contracts, its limited ability to commit to not strategically default and renegotiate its debt requires the firm to pay higher yields to its creditors. Hedged by credit derivatives, creditors have stronger bargaining power in the case of debt renegotiation, which ex-ante demotivates the firm to default strategically. In this paper, I aim to investigate theoretically and empirically whether credit derivatives could help reduce the cost of debt contracting stemming from the possibility of strategic default. I find that firms with a priori high strategic default incentives experience a relatively large reduction in their corporate bond spreads after the introduction of credit default swaps (CDS) written on their debt. This result is robust to controlling for the endogeneity of CDS introduction. My finding is consistent with the presence of CDS reducing the strategic default-related cost of corporate debt, suggesting the beneficial role of credit derivatives as a commitment device for the borrower to repay the lender.

This paper examines existing methods of estimating the translog production function and provides a general framework that allows for variable returns to scale. The model is based on the inverse input demand function and embeds a nonhomothetic production technology. Previous estimation methods are valid only for homogeneous technologies with fixed scale effects. Estimation results for U.S. manufacturing show that neither homotheticity and homogeneity nor constant returns to scale is a proper characterization of the underlying structure of production, thereby vindicating the empirical relevance of the inverse demand framework that entails a nonhomothetic technology. Copyright 1992 by MIT Press.

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

We study the role of public risk-sharing in markets where firms face substantial cost uncertainty, focusing on public reinsurance in health insurance. We develop a model where insurers internalize cost uncertainty through risk charges that raise effective marginal costs and create a role for reinsurance. Public reinsurance lowers both expected costs and cost volatility, particularly for smaller insurers, reducing prices and enhancing competition. Using an event study of staggered state-level reinsurance programs, we show that public reinsurance leads insurers to lower prices and private reinsurance purchases, benefiting financially constrained insurers the most. Structural estimates indicate that risk charges account for a substantial share of the premium-cost wedge and highlight public reinsurance’s comparative advantage over premium subsidies by providing risk protection and enhancing competition. Our results underscore the importance of accounting for firms’ risk exposure in policy design and provide a general framework for understanding public risk-sharing policies.

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

Using the quarterly Compustat files, we present empirical findings that business capital investment is significantly higher in the fourth quarter than in other quarters. Even after controlling for business capital investment determinants, we find that the fourth quarter capital investment is significantly larger but less sensitive to investment opportunities than other quarters' capital investment. This phenomenon is more evident for firms with larger cash holdings than for firms with smaller cash holdings, for larger firms than for smaller firms, and for diversified firms than for stand-alone firms. Our findings suggest a high level of agency costs in corporate investment decisions.

[Previous market-based research has generally failed to detect significantly negative market price reaction to the issuance of SFAS No. 8. Using standardized abnormal returns, this study re-examines the issue. Reaction to events culminating in the issuance of SFAS No. 52 is also studied. Finally, since the accounting method used prior to SFAS No. 8 may be related to the costs imposed by SFAS No. 8, the method is determined and its effect on the observed market reactions is investigated. Our results indicate an overall negative reaction to SFAS No. 8, with a positive reaction to SFAS No. 52. In addition, the pre-SFAS No. 8 method of accounting for foreign currency translation is found to be related to the market reactions to SFAS No. 8 and SFAS No. 52 in mixed and unpredictable ways.]

This article investigates spillovers from foreign economies to the U.S. through changes in long-term Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes, a proxy for foreign shocks’ contribution to U.S. yields. A model that identifies U.S., Euro area, and U.K. shocks that move global yields suggests that foreign shocks account for at least 20% of the daily variation in long-term U.S. yields in recent years. We also document the predictability of long-term U.S. yields by the U.S.–foreign yield spread.

We examine the structural stability of Gaussian shadow rate term structure models in a sample of Treasury yields that includes the “effective lower bound” (ELB) period from 2008 to 2015. After highlighting the challenges of testing for structural breaks in a latent-factor model, we proceed to document various pieces of empirical evidence for a structural break. As one of several practical implications, the expected policy rate paths during ELB years are notably shallower in our model that accommodates a structural break compared with a model that imposes structurally stability.

This paper examines the Reaching-for-Coupon (RFC) phenomenon in U.S. corporate bond mutual funds. We define RFC as a portfolio tilt toward higher-coupon bonds relative to peers with similar yields. Using detailed bond-level holdings data from 2002–2018, we construct a novel fund-level RFC measure and show that high-RFC funds attract larger inflows, particularly in low-interest-rate environments. Crucially, investor flows into RFC funds are less sensitive to poor performance, leading to a less concave flow–performance relationship and mitigating redemption-driven fragility. These altered flow dynamics strengthen managerial incentives to take risk. Moreover, compared to Reaching-for-Yield (RFY) funds, RFC funds provide more stable income streams and are less exposed to credit downgrades. Our results demonstrate that RFC captures a distinct channel through which income-driven investor demand shapes risk-taking and fragility in bond markets.