A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.
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Results 12 resources
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Recent nonparametric estimation studies pioneered by Ait-Sahalia document that the diffusion of the short rate is similar to the parametric function, r[superscript 1.5], estimated by Chan et al., whereas the drift is substantially nonlinear in the short rate. These empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior. This article presents such a model. Our model delivers closed-form solutions for bond prices and a concave relationship between the interest rate and the yields. We show that in empirical analyses, our model outperforms the one-factor affine models in both time-series as well as cross-sectional tests.
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We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant, even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.
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This article uses bond market data to empirically test the asset pricing model of Kazemi (1992). According to this model the rate of return on a long-term, pure-discount, default-free bond will be perfectly correlated with changes in the marginal utility of the representative investor. The covariability between financial asset returns and returns on such a bond can therefore serve as a measure of the riskiness of assets. The aim of this study is to determine whether the model can explain cross-sectional differences in the monthly returns of bonds with different maturity dates. We estimate and test the restrictions imposed by the model on returns of default-free bonds, while allowing the conditional distribution of bond returns to be time varying. The model is rejected during the full sample period (1973-1995) and the subperiod (1973-1980) when the Federal Reserve's focus is on interest rates, while the model is not rejected during the subperiod (1981-1995) when the Federal Reserve's focus is on money supply.
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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.
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Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illusion, (iii) peso problems, and (iv) different estimators. Utilizing data on taxable and tax‐exempt bond interest rates and several different estimators, we find that the Fisher effect estimates are always larger for the taxable bond relative to the tax‐exempt bond, suggesting that fiscal illusion and different estimators cannot account for the previous results.
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A firm's instantaneous probability of default is modeled as a translated square-root diffusion process modified to allow the process to be correlated with default-free interest rates. The parameters of the process are estimated for 161 firms. An extended Kalman filter approach is used that incorporates both the time-series and cross-sectional (term structure) properties of the individual firms' bond prices. The model is reasonably successful at fitting corporate bond yields, while key features of the term structures of yield spreads are captured in the signs and magnitudes of the resulting parameter estimates.
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This article presents convenient reduced-form models of the valuation of contingent claims subject to default risk, focusing on applications to the term structure of interest rates for corporate or sovereign bonds. Examples include the valuation of a credit-spread option.
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Previous studies identify predetermined variables that predict stock and bond returns through time. This paper shows that loadings on the same variables provide significant cross‐sectional explanatory power for stock portfolio returns. The loadings are significant given the three factors advocated by Fama and French (1993) and the four factors of Elton, Gruber, and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The results carry implications for risk analysis, performance measurement, cost‐of‐capital calculations, and other applications.
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This paper analyzes junk bond defaults during 1980 to 1991 to determine which factors affect the length of time spent in default. Bondholder holdouts are not a significant problem, as firms with proportionately more bonds have shorter default spells. In contrast, bank debt is associated with slower restructurings. Bargaining problems arising from contingent liabilities, lawsuits, and size delay the process, although multiple bond classes do not. Neither information problems nor firm value appear to matter. HLTs do not resolve their defaults at a significantly faster pace. Defaults tend to take less time in the 1990s, despite Drexel's disappearance from the market.