I extract credit pricing information from the prices of callable corporate debt, by disentangling the components of callable corporate bond prices associated with discounting at market interest rates, discounting for default risk, and optionality. The results include the first empirical analysis, in the setting of standard arbitrage-free term-structure models, of the time-series behavior of cal...

We study the representative consumer’s risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual cons...

Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the theory of asset prices. The basic assumption is to summarize any probability distribution into its moments so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles...

This study examines the performance of the S&P 100 implied volatility as a forecast of future stock market volatility. The results indicate that the implied volatility is an upward biased forecast, but also that it contains relevant information regarding future volatility. The implied volatility dominates the historical volatility rate in terms of ex ante forecasting power, and its forecast err...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. Ignoring the small approximation error, the difference between the realized variance an...

The Federal Reserve adjusts the federal funds target rate discretely, causing discontinuity in short-term interest rates. Unlike Poisson jumps, these adjustments are well anticipated by the market. We propose a term structure model that incorporates an anticipated jump component with known arrival times but random jump size. We find that doing so improves the model performance in capturing the ...

Assuming a product space model for biometric and financial events, there exists a rather natural principle for the decomposition of gains of life insurance contracts into a financial and a biometric part using orthogonal projections. In a discrete time framework, the paper shows the connection between this decomposition, locally variance-optimal hedging and the so-called pooling of biometric ri...

Inflation targeting is gaining popularity as a framework for conducting monetary policy. At the same time many countries employ some sort of foreign exchange intervention policy assuming that these two policies can coexist. This paper attempts to show that both policies are not sustainable. Israel is a classic test case. We test our hypothesis using information from the financial markets. The r...

We provide a model for a futures clearinghouse to use for setting optimal levels of clearing margin, capital and price limits, which minimizes the costs to clearing firms and simultaneously protects the clearinghouse from default by clearing firms. We show how to estimate the capital requirement, which supports the clearinghouse s residual default risk that is not covered by the clearing margin...