We introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, we develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units and establish the...

We introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, we develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units, and establish the...

This paper uses regression analysis to compare the market pricing of the default risk of banks to that of other firms. We study how CDS traders discriminate between banks and other type of firms and how their judgement changes over time, in particular, since the start of the recent financial...

The market model of interest rates specifies simple forward or Libor rates as lognormally distributed, their stochastic dynamics has a linear volatility function. In this paper, the model is extended to quadratic volatility functions which are the product of a quadratic polynomial and a...

Most central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions...

It is well-known that Gaussian hedging strategies are robust in the sense that they always lead to a cost process of bounded variation and that a superhedge is possible if upper bounds on the volatility of the relevant processes are available, cf. El Karoui, Jeanblanc-Picque and Shreve (1998)...

This study empirically examine the impact of market conditions on credit spreads as motivated by recently developed structural credit risk models. Using credit default swap (CDS) spreads, we find that, in the time series, average credit spreads are decreasing in GDP growth rate, but increasing...

We study the risk of holding credit default swaps (CDS) in the trading book. In particular, we compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm's equity. Our sample consists of CDS – stock price pairs for 86 actively traded firms over the period...

Credit risk models should reflect the observation that the relevant value of collateral is generally not the average value of the asset over all possible states of nature. In most cases, the relevant value of collateral for the lender is its secondary market value in bad states of nature, where...

The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a "path" factor signaling information about future policy actions, which is filtered from federal funds futures data. The uncertainty is highest when it...