Using structural credit risk models to estimate default dependence requires estimates of correlations of changes in distance-to-default. We present a structural model that yields simple relations between asset value, distance-to-default, and CDS spreads, allowing the correlations to be estimated from CDS spreads. We generalize the model to include a randomly varying default boundary; in this version the distance-to-default dynamics also depend on the movement of the default boundary. The CDS spread correlations we estimate exceed equity correlations, consistent with a randomly varying default boundary. We also present evidence that variations in funding liquidity affect the correlations, consistent with recent models. (JEL G13, G23)

Most models of trade in speculative markets assume that agents interpret public information identically. We provide empirical evidence on the relation between the volume of trade and stock returns around public announcements, and we argue that the evidence is inconsistent with this assumption. We then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume-return relation. Then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts' earnings forecasts. The hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data.

The authors propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds. The method is applied to an extension of a two-factor model due to J. C. Cox, J. E. Ingersoll, and S. A. Ross (1985). The authors' results show that estimates based on only bills imply unreasonably large price errors for longer maturities. They reject the original Cox, Ingersoll, and Ross model using a likelihood ratio test and conclude that the extended Cox, Ingersoll, and Ross model also fails to provide a good description of the Treasury market.

This paper uses a novel dataset of commodity-linked notes (CLNs) to examine the impact of the flows of financial investors on commodity futures prices. Investor flows into and out of CLNs are passed to and withdrawn from the futures markets via issuers' trades to hedge their CLN liabilities. The flows are not based on information about futures price movements but nonetheless cause increases and decreases in commodity futures prices when they are passed through to and withdrawn from the futures markets. These finding are consistent with the hypothesis that non-information-based financial investments have important impacts on commodity prices.

[The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the "proxy problem"). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the two-factor affine model of Longstaff and Schwartz (1992), the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years. We also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model. When applied to a nonlinear single-factor model, they suggest that the proxy problem can be economically significant.]

[This article uses a unique option data set to provide detailed descriptive statistics on the purchased and written open interest and open buy and sell volume of several classes of investors. We also show that volatility trading through straddles and strangles accounts for a small fraction of option trading volume and presents evidence that a large percentage of call writing is part of covered call positions. Finally, we find that during the stock market bubble of the late 1990s and early 2000 the least sophisticated investors in the data set substantially increased their purchases of calls on growth but not value stocks.]

Aït‐Sahalia (1996) and Stanton (1997) use nonparametric estimators applied to short‐term interest rate data to conclude that the drift function contains important nonlinearities. We study the finite‐sample properties of their estimators by applying them to simulated sample paths of a square‐root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in Aït‐Sahalia (1996) and Stanton (1997) . Combined with the results of a weighted least squares estimator, this evidence implies that nonlinearity of the short rate drift is not a robust stylized fact.

We propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae, using data on both discount and coupon bonds. The method is applied to an extension of a two-factor model due to Cox, Ingersoll, and Ross (1985; CIR). Our results show that estimates based on only bills imply unreasonably large price errors for longer maturities. We reject the original CIR model using a likelihood ratio test, and conclude that the extended CIR model also fails to provide a good description of the Treasury market.

ABSTRACT We propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae, using data on both discount and coupon bonds. The method is applied to an extension of a two‐factor model due to Cox, Ingersoll, and Ross (1985 ; CIR). Our results show that estimates based on only bills imply unreasonably large price errors for longer maturities. We reject the original CIR model using a likelihood ratio test, and conclude that the extended CIR model also fails to provide a good description of the Treasury market.

The options-based approach to studying irreversible investment under uncertainty emphasizes that the opportunity cost of investment includes the value of the option to wait that is extinguished when an investment is undertaken. Thus, the investment decision is affected by the determinants of the value of this option. We extend and generalize a standard model of irreversible investment by introducing a second fully reversible technology, and also incorporate partial reversibility by allowing capital to be abandoned at a cost. As in the existing literature, we find that the threshold value of the “underlying asset” (in our case, demand) at which investment takes place is increasing in the uncertainty of demand. We also find that the value of the option and thus the threshold value of the option value multiple at which investment takes place may be either increasing or decreasing in the uncertainty of demand. In addition, we find that for the case in which capital is used to replace the reversible technology, the threshold value of the option value multiple is insensitive to the degree of reversibility of capital.