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This article presents a new approach to modeling term structures of bonds and other contingent claims that are subject to default risk. As in previous “reduced-form” models, we treat default as an unpredictable event governed by a hazard-rate process.1 Our approach is distinguished by the parameterization of losses at default in terms of the fractional(More)
Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects(More)
I find that the standard class of affine models produces poor forecasts of future changes in Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: The compensation that investors receive for facing risk is a multiple of the variance of the risk. This(More)
How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk? No consensus has yet emerged from the existing credit risk literature on how much of the observed corporate-Treasury yield spreads can be explained by credit risk. In this paper, we propose a new calibration approach based on historical default data and show that one can indeed obtain(More)
Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional “expectations theory,” we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and(More)
The merit of international convergence of bank capital requirements in the presence of divergent closure policies of di¡erent central banks is examined. The lack of a complementary variation between minimum bank capital requirements and regulatory forbearance leads to a spillover from more forbearing to less forbearing economies and reduces the competitive(More)
This article is a critical survey of models designed for pricing fixed-income securities and their associated term structures of market yields. Our primary focus is on the interplay between the theoretical specification of dynamic term structure models and their empirical fit to historical changes in the shapes of yield curves. We begin by overviewing the(More)
This paper develops and empirically implements an arbitrage-free, dynamic term structure model with “priced” factor and regime-shift risks. The risk factors are assumed to follow a discrete-time Gaussian process, and regime shifts are governed by a discrete-time Markov process with state-dependent transition probabilities. This model gives closed-form(More)
Building on Duffie and Kan (1996), we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation has more(More)