This paper highlights two new effects of credit default swap markets (CDS) in a general equilibrium setting. First, when firms' cash flows are correlated, CDSs impact the cost of capital{credit spreads{and investment for all firms, even those that are not CDS reference entities. Second, when...

This paper shows that credit default swaps (CDS) can affect the type of debt firms issue. Firms face a trade-off between investment scale and the cost of capital measured by the credit spread. Small-scale investment is safe, fully collateralized, but earns modest profits in all states....

The article presents a historical review of the literature related to the empirical problem of excessive risk premium. The risk premium (the difference between the return on equities and risk-free rate) observed in financial markets cannot be reconciled with theoretical models of financial...

In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in each situation converge...

Pricing and hedging of long-term interest rate sensitive products require to extrapolate the term structure beyond observable maturities. For the resulting limiting term structure we show two results by postulating no arbitrage in a bond market with infinitely increasing maturities: long...

The paper presents a comprehensive data set of all bonds issued by the sixteen German states (L¨ander) since 1992. It thus provides a complete picture of a capital market comparable in size to funds raised in the German fixed income market for corporations. The quantitative analysis reveals...

We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model...

Understanding the nature of credit risk has important implications for financial stability. Since authorities notably, central banks focus on risks that have systemic implications, it is crucial to develop ways to measure these risks. The difficulty lies in finding reliable measures of aggregate...

In a tractable stochastic volatility model, we identify the price of the smile as the price of the unspanned risks traded in SPX option markets. The price of the smile reflects two persistent volatility and skewness risks, which imply a downward sloping term structure of low-frequency variance...

We study the price pressure and price discovery effects in the U.S. Treasury market by using a term structure model. Our model decomposes yield curve shifts into two components: a virtually permanent change related to order flow and a transitory, price pressure effect due to dealer inventories....