We explore the practitioners methodology of choosing time-dependent parameters to fit a bond model to selected asset prices, and show that it can lead to systematic mispricing of some assets. The Black-Derman-Toy model, for example, is likely to overprice call options on long bonds when interest...

We provide a useracirc;not;quot;s guide to acirc;not;Sexoticacirc;not;? preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risk sensitive and robust control, acirc;not;Shyperbolicacirc;not;? discounting, and...

We provide a useracirc;not;quot;s guide to acirc;not;Sexoticacirc;not;? preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risk sensitive and robust control, acirc;not;Shyperbolicacirc;not;? discounting, and...

Prices of riskfree bonds in any arbitrage-free environment are governed by a pricing kernel: given a kernel, we can compute prices of bonds of any maturity we like. We use observed prices of multi-period bonds to estimate, in a log- linear theoretical setting, the pricing kernel that gave rise...

We use a fractional difference model to reconcile two features of yields on US government bonds with modem asset pricing theory: the persistence of the short rate and variability of the long end of the yield curve. We suggest that this process might arise from the response of the heterogeneous...

We investigate markets for defaultable sovereign debt in which even though there are many identical lenders and symmetric information (including no hidden actions), perfect competition does not obtain. When a private lender allows a sovereign country to increase its level of indebtedness, that...

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. Asset pricing and trading, in these cases, are intrinsically...

We provide an axiomatic model of preferences over atemporal risks that generalizes Gul (1991) A Theory of Disappointment Aversion' by allowing risk aversion to be first order' at locations in the state space that do not correspond to certainty. Since the lotteries being valued by an agent in an...

Mathematical models of bond pricing are used by both academics and Wall Street practitioners, with practitioners introducing time-dependent parameters to fit acirc;not;Sarbitrage-freeacirc;not;? models to select asset prices. We show, in a simple one-factor setting, that the ability of such models...

We explore the bond-pricing implications of an exchange economy where (i) preference shocks result in time-varying term premiums in real yields, and (ii) a monetary policy Taylor rule determines inflation and nominal term premiums. A calibrated version of the model matches the observed term...