ABSTRACT Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean‐reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low‐leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative‐grade debt, consistent with recent empirical findings.

ABSTRACT This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We find upstairs market makers effectively screen out information‐motivated orders and execute large liquidity‐motivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one‐quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book. Trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market.

This project tests for the effect of social status in a laboratory experimental market. We consider a special “box design” market in which a vertical overlap in supply and demand ensure that there are multiple equilibrium prices. We manipulate the relative social status of our subjects by awarding high status to a subset of the group based on one of two procedures. In the first, a subject's score on a trivia quiz determines his or her status; in another, subjects are assigned randomly to a higher-status or lower-status group. In both treatments we find that average prices are higher in markets where higher-status sellers face lowerstatus buyers, and lower when buyers have higher status than sellers. Across all sessions, the higher-status side of the market captures a greater share of the surplus, earning significantly more than their lower-status counterparts.

Traffic fatalities are the leading cause of death among teens and young adults, accounting for one-third of all deaths among those 15–20 years of age. The large share of teen mortality attributed to car travel is not entirely unexpected. Driving is an inherently risky activity, and teens rarely die of other nonviolent causes. However, teens also face levels of traffic-related risk that are substantially higher than those of older, more experienced drivers. For example, the teen traffic fatality rate (defined as deaths of 16–19-year-olds per population) is nearly double the rate for adults aged 25 and older. Since teens drive less than adults, this ratio increases to nearly 2.5 when denominated by miles of travel. While these are sobering numbers, teen traffic safety has improved considerably over the past 20 years. Since 1979, the teen traffic fatality rate has fallen by 37 percent. Much of this drop occurred in the 1986–1992 period when rates fell 25 percent. These decreases in teen fatality rates are much larger than the contemporaneous changes for adults aged 25 and older, whose fatality rates fell by 22 percent in the 1979–1997 period, and by 13 percent over the 1986–1992 time frame. The relative improvements of teens are even more impressive when one considers that they have become increasingly dependent on the automobile. Between 1983 and 1995, vehicle miles traveled by teens aged 16–19 nearly doubled. When denominated by vehicle miles traveled, teen fatality rates have fallen by 50 percent since 1983. The gains in teen traffic safety are likely to reflect a number of causes. For example, over this period, there were several advances in car crash-worthiness (e.g., improved designs, increased car weight, the introduction of air bags). However, these improvements also appear to reflect a reduction in risk-taking behind the wheel, in particular, increases in seat-belt use and reductions in drunk driving. In this study, we present some evidence on the efficacy of key state policies in promoting these gains by discussing reduced-form models of traffic fatalities. We also consider whether the life-saving effects of an important policy, minimum legal drinking ages, have been attenuated by a possible shift of alcohol-related traffic risks to young adulthood.

ABSTRACT Using dealer's quotes and transactions prices on straight industrial bonds, we investigate the determinants of credit spread changes. Variables that should in theory determine credit spread changes have rather limited explanatory power. Further, the residuals from this regression are highly cross‐correlated, and principal components analysis implies they are mostly driven by a single common factor. Although we consider several macroeconomic and financial variables as candidate proxies, we cannot explain this common systematic component. Our results suggest that monthly credit spread changes are principally driven by local supply/demand shocks that are independent of both credit‐risk factors and standard proxies for liquidity.

ABSTRACT Although traded as distinct products, caps and swaptions are linked by no‐arbitrage relations through the correlation structure of interest rates. Using a string market model, we solve for the correlation matrix implied by swaptions and examine the relative valuation of caps and swaptions. We find that swaption prices are generated by four factors and that implied correlations are lower than historical correlations. Long‐dated swaptions appear mispriced and there were major pricing distortions during the 1998 hedge‐fund crisis. Cap prices periodically deviate significantly from the no‐arbitrage values implied by the swaptions market.