The payoffs of path-dependent options depend not only on the nal values, but also on the sample paths of the prices of the underlying assets. A rigorous modeling of the under-lying asset price processes which can appropriately describe the sample paths is therefore critical for pricing...

Since Black and Scholes (1973) and Merton (1974), structural models of credit risk have relied almost exclusively on diffusion processes to model the evolution of firm value. While a diffusion approach is convenient, in empirical application, it has produced very disappointing results. Jones,...

In markets with trading friction, the incorporation of information into market prices can be substantially delayed through a weakening of the arbitrage process. We re-examine the profitability of relative-strength, or momentum, trading strategies (buying past strong performers and selling past...

Standard approaches to building and estimating dynamic term structure models rely on the assumption that yields can serve as the factors. However, the assumption is neither theoretically necessary nor empirically supported. This paper documents that almost half of the variation in bond risk...

No-arbitrage term structure models impose cross-sectional restrictions among yields and can be used to impose dynamic restrictions on risk compensation. This paper evaluates the importance of these restrictions when using the term structure to forecast future bond yields. It concludes that no...

Conditional maximum Sharpe ratios implied by fully flexible four-factor and five-factor Gaussian term structure models are astronomically high. Estimation of term structure models subject to a constraint on their Sharpe ratios uncovers properties that hold for a wide range of Sharpe ratios....

This chapter reviews some of the academic literature that links nominal and real term structures with the macroeconomy. The main conclusion is that none of our models is consistent with basic properties of nominal yields. It is difficult to explain the average shape of the nominal yield curve,...