We construct an empirical measure of market frictions in the corporate market based on the difference between the corporate bond spread and the credit default swap spread for a large number of firms in a new, large dataset that we construct. Under fairly standard assumptions, the two spreads...

This paper contributes to the development of recent literature on the explanation power and calibration issue of heterogeneous asset pricing models by presenting a simple stochastic market fraction asset pricing model of two types of traders (fundamentalists and trend followers) under a market...

Equity market crashes or booms are extreme realizations of the underlying return distribution. This paper questions whether booms are more or less likely than crashes and whether emerging markets crash more frequently than developed equity markets. We apply Extreme Value Theory (EVT) to...

We investigate the suitability of sparse grids for solving high-dimensional option pricing and interest rate models numerically. Starting from the partial differential equation, we try to - at least partially - break the curse of dimensionality through sparse grids which will result from a...

This paper asks the question of whether the newly available TIPS yields data can help us achieve a better understanding of the real term structure and the inflation expectations. The yield differential between TIPS and comparable nominal coupon securities is not a direct measure of inflation...

The commercial mortgage-backed security market has experienced rapid growth in recent years, and is now the second most important source of intermediation to the commercial real estate sector. Despite its growing importance, relatively little academic research has questioned the apparent success...

We extends the aggregate risk modeling approach to include the regime switching risk triggered by a `regime shift' in economic conditions and to uncertainty aversion (robust control). We use a regime switching process rather than the popular diffusion-jump process for a number of reasons....

Recent studies by Dai and Singleton (2002), Duffee (2002), and Duarte (2004) show that affine term structure models that match the time variability of the expected returns of bond yields do not generate time variation in the volatility of interest rates. This failure indicates that affine models...

Long-range dependence in volatility is one of the most prominent examples of applications in financial market research involving universal power laws. Its characterization has recently spurred attempts at theoretical explanation of the underlying mechanism. This paper contributes to this recent...

A combination of observed and unobserved (latent) factors capture term structure dynamics. Information about these dynamics is extracted from observed factors without specifying or estimating any of the parameters associated with latent factors. Estimation is equivalent to fitting the moment...