The evidence from the repo market is more supportive to the expectations hypothesis, but term structure anomalies still remain. Using the Bekaert–Hodrick–Marshall (2001) method, we investigate whether term structure anomalies can be explained by peso problems by estimating a regime-switching model for the overnight repo rate. We find that term structure anomalies can largely be accounted for by peso problems, probably along with a small time-varying risk premium for the full sample. However, peso problem explanations cannot resolve term structure anomalies for the postcrisis sample. In addition, we find that three regimes are related to calendar effects in the repo market.

This paper studies the welfare implications of various government policies that have been used to prevent bank runs. The benchmark model suggests that a bank run is a business-cycle-state-related phenomenon and it leads to the failure of the risk-sharing mechanism provided by the banking sector. Extensions of the model show that a number of policy instruments, including the suspension of convertibility of deposits, the taxation on short-term deposits, reserve requirement and blanket guarantee, turn out to be inefficient. Instead, I propose that a limited-coverage deposit insurance scheme or capital requirements can be welfare-improving.

This paper studies how anticipated disagreement between a financier and an entrepreneur affects optimal contracting and asset prices. The value of debt is uniquely immune to anticipated disagreement, and when the set of anticipated disagreements is sufficiently rich, this immunity causes the optimal contract to give the financier debt. In contrast, the values of other contracts, including equity, decline as anticipated disagreement becomes more severe. This suggests a channel through which an increase in the severity of anticipated disagreement increases the equity premium and the debt-to-equity ratio.

This paper introduces a regime-switching combination approach to predict excess stock returns. The approach explicitly incorporates model uncertainty, regime uncertainty, and parameter uncertainty. The empirical findings reveal that the regime-switching combination forecasts of excess returns deliver consistent out-of-sample forecasting gains relative to the historical average and the Rapach et al. (2010) combination forecasts. The findings also reveal that two regimes are related to the business cycle. Based on the business cycle explanation of regimes, excess returns are found to be more predictable during economic contractions than during expansions. Finally, return forecasts are related to the real economy, thus providing insights on the economic sources of return predictability.

GAAP provisions in loan contracts specify how to address the effect of accounting changes on financial covenants. I document a pronounced upward trend in and the dominance of frozen‐on‐request (FOR) GAAP provisions, which incorporate accounting changes unless either the borrower or the lender requests a freeze. FOR GAAP streamlines the process of incorporating accounting changes into covenant calculations by obviating the need for renegotiations and prevents opportunistic GAAP freezes by requiring good faith renegotiations. Therefore, FOR GAAP is more likely to incorporate accounting changes beneficial to covenant informativeness, leading to lower false positives (i.e., Type I errors of financial covenant violations) and false negatives (i.e., Type II errors of financial covenant violations). Based on a large sample of loan contracts, I find that FOR GAAP decreases false positives and false negatives after controlling for self‐selection bias and that the decrease is more pronounced when accounting changes relevant to financial covenants are more significant. My study provides new evidence of the role accounting standards and GAAP provisions play in debt contracting efficiency.

We study the design of credit default swaps (CDS) auctions, which determine the payments by CDS sellers to CDS buyers following defaults of bonds. Using a simple model, we find that the current design of CDS auctions leads to biased prices and inefficient allocations. This is because various restrictions imposed in CDS auctions prevent certain investors from participating in the price discovery and allocation process. The imposition of a price cap or floor also gives dealers large influence on the final auction price. We propose an alternative double auction design that delivers more efficient price discovery and allocations.

In this paper, we reexamine and extend the stochastic volatility model of Stein and Stein (S&S) (1991) where volatility follows a mean–reverting Ornstein–Uhlenbeck process. Using Fourier inversion techniques we are able to allow for correlation between instantaneous volatilities and the underlying stock returns. A closed-form pricing solution for European options is derived and some numerical examples are given. In addition, we discuss the boundary behaviour of the instantaneous volatility at v(t) = 0 and show that S&S do not work with an absolute value process of volatility.

I examine how the investment behavior of bond mutual funds affects corporate financing decisions. Mutual funds that hold a firm’s existing bonds have a high propensity to acquire additional new issuances from the same firm. I utilize this stylized fact to construct a firm-specific bond capital supply measure by aggregating flows from a firm’s existing bondholders. Firms with a higher flow-driven capital supply are more likely to issue bonds, enjoy lower yields, and substitute away from equity financing and bank loans. Information acquisition costs and underwriter relationship likely contribute to the impact of flow-driven capital supply.