Papers, wiki, Option Blackboard, encyclopedia, and cards.
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…
This paper attempts to explain the credit default swap (CDS) premium, using a novel approach to identify the volatility and jump risks of individual firms from high-frequency equity prices. Our empirical results suggest that the volatility risk alone predicts 48% of the variation in CDS spread levels, whereas the jump risk alone forecasts 19%. After controlling for credit ratings, macroeconomic conditions, and firms'…
ABSTRACT We find that liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4,000 corporate bonds and spanning both investment grade and speculative categories, we find that more illiquid bonds earn higher yield spreads, and an improvement in liquidity causes a significant reduction in yield spreads. These results hold after controlling for common bond‐specific, firm‐spec…
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 …
We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer’s assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of the firm are a geometric Brownian motion until informed equityholders optimally liquidate, we derive the conditional distribution …
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…
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…
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 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…
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 provide a general HJM framework for forward contracts written on abstract market indices with arbitrary fixing and payment adjustments, and featuring collateralization in any currency denominations. In view of this, we first provide a thorough study of cross-currency markets in the presence of collateral and incompleteness. Then we give a general treatment of collateral dislocations by describing the instantaneous…
Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Fed Funds, and Eurodollar futures rates as well as spot USD LIBOR and term repo rates. The framework endogenously models basis spreads between each of the benchmark rates and allows for the decomposition of spreads. Modelling the LIBOR-OIS spread as credit and funding-liquidity roll-over risk, we find that the spike in …
This paper develops a three-currency Heath-Jarrow-Morton framework in which corporate credit is treated as a separate economy, connected to the nominal and real economies through synthetic inflation and credit exchange rates. The framework produces a testable identity. Under joint no-arbitrage, the credit spread of an issuer expressed over the inflation-rateindexed risk-free curve equals the same issuer's credit spre…
In the LIBOR era, banks routinely tied revolving credit facilities to credit-sensitive benchmarks. This study assesses the Across-the-Curve Credit Spread Index (AXI) -- a transparent, transaction-based measure of wholesale bank funding costs -- as a complement to SOFR, summarizing its behavior, construction, and loan-pricing implications. AXI aggregates observable unsecured funding transactions across short- and long…
A growing number of contributions in the literature have identified a puzzle in the European carbon allowance (EUA) market. Specifically, a persistent cost-of-carry spread (C-spread) over the risk-free rate has been observed. We are the first to explain the anomalous C-spread with the credit spread of the corporates involved in the emission trading scheme. We obtain statistical evidence that the C-spread is cointegra…
We demonstrate that wave amplification enables even weak nonlinearities to reshape linear wave-packet transport in nonreciprocal systems. We study the dynamics of bulk Gaussian wave packets in the Hatano--Nelson model with onsite cubic nonlinearity. We show that the interplay between nonlinearity and amplification generates growing frequency shifts that drive the wave packet through three successive dynamical regimes…
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.
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.
Commercial paper spreads track the cost of short-term corporate borrowing relative to safer benchmarks and help identify stress in corporate funding markets.
Investment Grade OAS measures the spread of high-quality corporate bonds over Treasuries after adjusting for embedded options, helping track broad corporate credit conditions.
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.
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.
How price actually forms through order flow, spreads, inventory, and participant interaction.
Leveraged Loan Index — Floating-rate corporate credit sensitive to defaults, spreads, and CLO demand.
Cointegration Pairs Trading — Mean-reversion on stationary spreads between related instruments.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
CLO Spreads (Fixed Income).
CLO Spreads (Fixed Income).
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.
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.
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.