It is well-documented that government bonds with almost identical cash flows can trade at different prices. This article analyzes the cross-section of bond spreads across developed European countries and documents a novel result. While a measure of the convenience yield of government bonds helps explain these spreads, it cannot explain the behavior of bond spreads in periods of widening credit risk. The article documents bond spreads between new and old issues tighten for low-quality sovereigns. In other words, the newer more liquid bonds become cheaper, not more expensive, relative to their older counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds.

The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For example, for the persistence levels of dividend yields, the analytical correlation is 99% between the 1-and 2-year horizon estimators and 94% between the 1-and 5-year horizons, due to the combined effects of overlapping returns and the persistence of the predictive variable. Common sampling error across equations leads to ordinary least squares coefficient estimates and R2s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. The asymptotic theory is corroborated, and the analysis extended by extensive simulation evidence. We perform joint tests across horizons for a variety of explanatory variables, and provide an alternative view of the existing evidence.

This paper develops tests of inequality restrictions implied by conditional asset pricing models. The methodology is easy to implement, requires little knowledge of the conditional distribution of asset returns, and is valid under fairly weak assumptions. As an application, we test whether the ex ante risk premium is always positive. We report reliable evidence that the ex ante risk premium is negative in some states of the world; these states are related to periods of high expected inflation and especially to downward-sloping term structures.

This article provides an analytical solution to the problem of an institution optimally managing the market risk of a given exposure by minimizing its Value‐at‐Risk using options. The optimal hedge consists of a position in a single option whose strike price is independent of the level of expense the institution is willing to incur for its hedging program. This optimal strike price depends on the distribution of the asset exposure, the horizon of the hedge, and the level of protection desired by the institution. Moreover, the costs associated with a suboptimal choice of exercise price are economically significant.

Multivariate density estimation (MDE) suggests that mortgage-backed security (MBS) prices can be well described as a function of the level and slope of the term structure. We analyze how this function varies across MBSs with different coupons. An important finding is that the interest rate level proxies for the moneyness of the option, the expected level of prepayments, and the average life of the cash flows, while the term structure slope controls for the average rate at which these cash flows should be discounted. Though the origination and prepayment behavior of mortgages differ substantially across coupons, there remains an unexplained common factor in MBS prices. This factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists.

We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor.