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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. This article presents a new approach to modeling term structures of bonds and other(More)
A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. Using a variation of the method developed by Jackwerth and Rubinstein (1996), we estimate risk-neutral probabilities reliably from option prices. Subjective probabilities are estimated from realized returns. This paper then introduces a(More)
We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1/N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1/N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which(More)
London for providing the data on individual hedge funds and hedge fund indexes. We are thankful to Purnendu Nath and Subhra Tripathy for excellent research assistance. We are responsible for all errors. Abstract Hedge funds are known to exhibit non-linear option-like exposures to standard asset classes and therefore the traditional linear factor model(More)
We study the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of(More)
We test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk. The empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation. We then develop a model of international portfolio choice and equity(More)
Do strategic actions of borrowers and lenders have an impact on corporate debt value? Our evidence indicates that they do, though the economic significance of the effect is limited. The possibility of renegotiation on average increases corporate debt spreads by 2-8 basis points due to the threat of strategic default, even though there may be ex-post(More)
We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a ''confidence interval'' around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive features: (1) it has a solid axiomatic foundation; (2) it is flexible(More)
Repo contracts, the most important form of collateralized lending, are widely used by financial institutions and hedge funds to create short-selling positions and manage their leverage profile. Moreover, they have become the primary tool of money management and monetary control of several central banks, including the Bundesbank and the newly born European(More)
  • Julian Franks, Oren Sussman, Fellow, Ben, Ken Klee, Dan Bussel +23 others
  • 1998
In this paper we develop a corporate-finance oriented theory of financial innovations. The theory is motivated by the different corporate insolvency procedures in England and America. In the paper's empirical section we show that these procedures have emerged from different innovation regimes. English law was innovated by lenders and borrowers exercising(More)