This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interest-rate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a four-factor ane credit framework and...

If stocks go up, investors may want to rebalance their portfolios. But investors cannot all rebalance. Expected returns may need to change so that the average investor is still happy to hold the market portfolio despite its changed composition. In this way, simple market clearing can give rise...

This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interest rate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a general five-factor affine credit framework...

Many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth. We study the costs of these liquidity restrictions on stockholders using a continuous-time portfolio choice framework. These restrictions have major...

Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem....

In the absence of frictions, the value of the underlying asset impled by option prices must equal its actual market value. With frictions, however, this requirement need not hold. Using S amp; P 100 index options data, I find that the impled cost of the index is significantly higher in the...

In theory, an investor can make infinite profits by taking unlimited positions in an arbitrage. In reality, however, investors must satisfy margin requirements which completely change the economics of arbitrage. We derive the optimal investment policy for a risk-averse investor in a market where...

Although traded as distinct products, caps and swaptions are linked by no-arbitrage relations through the correlation structure of interest rates. Using a string model framework, we solve for the correlation matrix implied by the swaptions market and examine the relative valuation of caps and...

Empirical researchers have frequently rejected the expectations hypothesis. The expectations hypothesis, however, has seldom, if ever, been tested at the extreme short end of the term structure where maturities are measured in days or weeks. Using overnight, weekly, and monthly repo rates, I...

Traditional models of portfolio choice assume that investors can continuously trade unlimited amounts of securities. In reality, investors face liquidity constraints. We analyze a model where investors are restricted to trading strategies that are of bounded variation. An investor facing this...