ABSTRACT This article develops a multi‐factor econometric model of the term structure of interest‐rate swap yields. The model accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model‐based estimates of the defaultable zero‐coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero‐coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.

This paper develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model-based estimates of the defaultable zero coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero-coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.

Dynamic Asset Pricing Theory is a textbook for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimaltiy, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models. For simplicity, all continuous-time models are based on Brownian motion. Applications include term structure models, derivative valuation and hedging methods, and dynamic programming algorithms for portfolio choice and optimal exercise of American options. Numerical methods covered include Monte Carlo simulation and finite-difference solvers for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. This second edition is substantially longer, while still retaining the consciseness for which the first edition was praised. All chapters from the first edition have been revised. Two new chapters have been added on term structure modeling and on derivative securities. References have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains the definitive textbook in the field.

Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free labor prices, dividends, and aggregate income satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth. Copyright 1996 by University of Chicago Press.

We model the design of a benchmark fixing as an estimator of fair market value. The fixing data are the transactions of agents whose profits depend on the fixing, implying incentives for manipulation. We derive the optimal linear fixing under an assumption that transaction weights are unidimensional. We also axiomatically characterize the unique linear fixing that is robust to a certain form of collusion among traders. Our analysis provides a foundation for the commonly used volume-weighted average price (VWAP) and its analogue based on unidimensional weights. We characterize the relative advantages of these fixing designs, depending on market characteristics.

We introduce a family of generalized-method-of-moments estimators of the parameters of a continuous-time Markov process observed at random time intervals. The results include strong consistency, asymptotic normality, and a characterization of standard errors. Sampling is at an arrival intensity that is allowed to depend on the underlying Markov process and on the parameter vector to be estimated. We focus on financial applications, including tick-based sampling, allowing for jump diffusions, regime-switching diffusions, and reflected diffusions.

We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer’s assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of the firm are a geometric Brownian motion until informed equityholders optimally liquidate, we derive the conditional distribution of the assets, given accounting data and survivorship. Contrary to the perfect-information case, there exists a default-arrival intensity process. That intensity is calculated in terms of the conditional distribution of assets. Credit yield spreads are characterized in terms of accounting information. Generalizations are provided.

The paper provides conditions on the primitives of a continuous-time economy under which there exist equilibria obeying the Consumption-Based Capital Asset Pricing Model (CCAPM). The paper also extends the equilibrium characterization of interest rates of Cox, Ingersoll, and Ross (1985) to multi-agent economies. We do not use a Markovian state assumption.