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This paper introduces a novel stochastic model for credit spreads. The stochastic approach leverages the diffusion of default intensities via a CIR++ model and is formulated within a risk-neutral probability space. Our research primarily addresses two gaps in the literature. The first is the lack of credit spread models founded on a stochastic basis that enables continuous modeling, as many existing models rely on fa…
ABSTRACT Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean‐reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low‐leverage firms, and …
ABSTRACT This article examines the optimal capital structure of a firm that can choose both the amount and maturity of its debt. Bankruptcy is determined endogenously rather than by the imposition of a positive net worth condition or by a cash flow constraint. The results extend Leland's (1994a) closed‐form results to a much richer class of possible debt structures and permit study of the optimal maturity of debt as …
Over the last decade, the foreign exchange derivatives market has witnessed a collapse of covered interest parity (CIP). Not only does this collapse give rise to large deviations from CIP, it has unlocked a stream of exploitable arbitrage opportunities across currencies. In this paper, we introduce two new factors – inflation differential and relative economic performance – as potential drivers of deviations from CIP…
Do vulnerabilities in Decentralized Finance (DeFi) destabilize traditional short-term funding markets? While the prevailing ``Contagion Hypothesis'' posits that stablecoin reserve liquidations may transmit distress to traditional markets through fire-sale pressure, we document a short-horizon ``Flight-to-Quality'' pattern in the opposite direction. In the wake of major DeFi exploits, spreads on 3-month AA-rated comme…
Persistent shifts in term-structure dynamics undermine the stability of single-regime models in long samples. We develop an arbitrage-free regime-switching generalized CIR (RS-GCIR) model that jointly prices the Chinese government bond (CGB) curve and corporate bond curves. To capture the systematic transmission from interest-rate conditions to credit spreads, we structure the model into two blocks and price corporat…
We introduce a random forest approach to enable spreads' prediction in the primary catastrophe bond market. We investigate whether all information provided to investors in the offering circular prior to a new issuance is equally important in predicting its spread. The whole population of non-life catastrophe bonds issued from December 2009 to May 2018 is used. The random forest shows an impressive predictive power on…
Prediction markets are starting to look less like crowd polls and more like electronic markets. The central question is therefore no longer only whether these markets forecast well, but what happens when institutional liquidity enters: do spreads tighten, does price discovery improve, and do those gains actually reach the traders who are slowest to react when information arrives? This paper offers a research design f…
We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT Global Risk Model. Consistent with earlier studies, we find a strong negative correlation between sector spreads and rate shifts. However, we also observe that the correlations between spreads and Treasury twists reversed recently, which is likely attributable to the Fe…
Using micro-level data, we construct a credit spread index with considerable predictive power for future economic activity. We decompose the credit spread into a component that captures firm-specific information on expected defaults and a residual component–– the excess bond premium. Shocks to the excess bond premium that are orthogonal to the current state of the economy lead to declines in economic activity and ass…
We develop a structural credit-risk model under incomplete information in which investors observe firm value only indirectly through noisy market signals and scheduled corporate disclosures. While disclosure dates are known in advance, their informational content is random, leading to stochastic discontinuities in the observation process. We derive the Kushner-Stratonovich equation for structural credit-risk models w…
We explore the interplay between sovereign debt default/renegotiation and environmental factors (e.g., pollution from land use, natural resource exploitation). Pollution contributes to the likelihood of natural disasters and influences economic growth rates. The country can default on its debt at any time while also deciding whether to invest in pollution abatement. The framework provides insights into the credit spr…
This paper introduces a new risk-on risk-off strategy for the stock market, which combines a financial stress indicator with a sentiment analysis done by ChatGPT reading and interpreting Bloomberg daily market summaries. Forecasts of market stress derived from volatility and credit spreads are enhanced when combined with the financial news sentiment derived from GPT-4. As a result, the strategy shows improved perform…
Lead-lag relationships, integral to market dynamics, offer valuable insights into the trading behavior of high-frequency traders (HFTs) and the flow of information at a granular level. This paper investigates the lead-lag relationships between stock index futures contracts of different maturities in the Chinese financial futures market (CFFEX). Using high-frequency (tick-by-tick) data, we analyze how price movements …
We study the problem of forecasting and optimally trading day-ahead versus real-time (DART) price spreads in U.S. wholesale electricity markets. Building on the framework of Galarneau-Vincent et al., we extend spike prediction from a single zone to a multi-zone setting and treat both positive and negative DART spikes within a unified statistical model. To translate directional signals into economically meaningful pos…
In this paper, we consider a generic interest rate market in the presence of roll-over risk, which generates spreads in spot/forward term rates. We do not require classical absence of arbitrage and rely instead on a minimal market viability assumption, which enables us to work in the context of the benchmark approach. In a Markovian setting, we extend the control theoretic approach of Gombani & Runggaldier (2013) and…
We examine how heavy-tailed liquidity demand changes price discovery in a sequential limit order book with asymmetric information. In our setting, liquidity suppliers observe aggregate order flow, not its decomposition into informed demand and uninformed liquidity shocks. With heavy-tailed uninformed aggregated order flow, large trades remain plausibly uninformed over a wider range of depths, flattening price impact …
We show that net demand for liquidity by algo strategies is identifiable from its trade and price history alone, with no knowledge of its signal or optimization problem. An exact multi-period regret decomposition implies that the sign of this statistic classifies a linear strategy as a net liquidity consumer or provider, recovering the Kyle (1985) informed-trader/market-maker dichotomy from observables alone. Under a…
Too big to fail is the expectation that a firm’s collapse would force a public rescue — a subsidy in funding spreads and a policy problem.
CDX HY Index tracks the cost of insuring a basket of North American high-yield corporate credit and serves as a sensitive gauge of credit risk appetite and stress.
Investment Grade OAS measures the spread of high-quality corporate bonds over Treasuries after adjusting for embedded options, helping track broad corporate credit conditions.
Trade nearby versus deferred on the same curve — a pure term-structure book, the smallest-beta cousin of commodity RV.
Market-neutral futures spreads — calendar, inter-commodity, or intra-curve — a CTA that tries not to own outright direction.
Long one commodity, short a related one — WTI/Brent, gold/silver, corn/wheat, gas/power — a relative-value family across complexes.
Short-term interest-rate futures — SOFR, SONIA, Euribor strips — a specialist language of meeting-to-meeting path trades and pack/bundle spreads.
BTP-Bund spread measures the yield difference between Italian and German government bonds and is a key indicator of euro-area sovereign stress and fragmentation risk.
EMBI sovereign spread measures the yield premium on emerging-market sovereign debt over U.S. Treasuries and serves as a key gauge of EM credit risk and external financing stress.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
Leveraged Loan Index — Floating-rate corporate credit sensitive to defaults, spreads, and CLO demand.
Commercial paper spreads track the cost of short-term corporate borrowing relative to safer benchmarks and help identify stress in corporate funding markets.
A Financial Conditions Index aggregates variables such as rates, credit spreads, equities, and the dollar to measure how supportive or restrictive the market environment is for growth and risk assets.
Adverse selection is the expected loss a liquidity provider takes when the other side is informed — the Glosten–Milgrom reason spreads exist even with no inventory.
How price actually forms through order flow, spreads, inventory, and participant interaction.
Cointegration Pairs Trading — Mean-reversion on stationary spreads between related instruments.
Mean-revert spreads between country (or regional) ETFs that usually travel together — pairs at the index layer.
Adverse selection is the expected loss a liquidity provider takes when the other side is informed — the Glosten–Milgrom reason spreads exist even with no inventory.
Cointegration Pairs Trading — Mean-reversion on stationary spreads between related instruments.
Commercial paper spreads track the cost of short-term corporate borrowing relative to safer benchmarks and help identify stress in corporate funding markets.
Market-neutral futures spreads — calendar, inter-commodity, or intra-curve — a CTA that tries not to own outright direction.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
A Financial Conditions Index aggregates variables such as rates, credit spreads, equities, and the dollar to measure how supportive or restrictive the market environment is for growth and risk assets.
Leveraged Loan Index — Floating-rate corporate credit sensitive to defaults, spreads, and CLO demand.
How price actually forms through order flow, spreads, inventory, and participant interaction.
The mechanics of price formation through order flow, spreads, inventory, and liquidity.
Mean-revert spreads between country (or regional) ETFs that usually travel together — pairs at the index layer.
Short-term interest-rate futures — SOFR, SONIA, Euribor strips — a specialist language of meeting-to-meeting path trades and pack/bundle spreads.
Too big to fail is the expectation that a firm’s collapse would force a public rescue — a subsidy in funding spreads and a policy problem.
A liquidity premium monitor can separate default risk from liquidity-driven spread widening.
A card for handling fast markets, wide spreads, liquidity air pockets, and broken execution assumptions.
A card for tracking cross-currency basis, repo dislocations, and balance-sheet stress as early warning signals.