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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)
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)
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 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)
* We gratefully acknowledge financial support from INQUIRE UK; this article however represents the views of the authors and not of INQUIRE. We are very grateful toˇLuboš Pástor for extensive comments. We thank and the INQUIRE Fall 2003 conference for helpful suggestions. Abstract In this paper, we extend the mean-variance portfolio model where expected(More)
Many theoretical bond pricing models predict that the credit yield curve facing risky bond issuers is downward-sloping. Previous empirical research ~Sarig and Warga ~1989!, Fons ~1994!! supports these models. Our study examines sets of bonds issued by the same firm with equal priority in the liability structure, but with different maturities, thus holding(More)
  • Julian Franks, Oren Sussman, Ken Klee, Dan Bussel, Harry Rajak, Patrick Bolton +17 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)
We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies. We find no evidence of upward trends after extending the sample to 2008. Instead, idiosyncratic volatility is well described by a stationary autore-gressive process that occasionally switches into a higher-variance regime that has relatively(More)
Using a sample of 4,122 project finance loans, worth $769 billion, arranged between 1991 and 2005, we show that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the project sponsors, are(More)