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Report
Credit default swap auctions
The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds ...
Working Paper
Modeling credit contagion via the updating of fragile beliefs
We propose a tractable equilibrium model for pricing defaultable bonds that are subject to contagion risk. Contagion arises because agents with ?fragile beliefs? are uncertain about both the underlying state of the economy and the posterior probabilities associated with these states. As such, agents adopt a robust decision rule for updating that leads them to over-weight the posterior probabilities of ?bad? states. We estimate the model using panel data on sovereign Euro-zone CDS spreads during the recent crisis, and find that it captures levels and dynamics of spreads better than traditional ...
Working Paper
Initial public offerings in hot and cold markets
The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. Others suggest hot market IPOs are firms that take advantage of irrational investors. We compare firms that go public in a number of hot and cold markets during 1975- 2000, examining them at the time ...
Journal Article
Understanding aggregate default rates of high yield bonds
The New York-New Jersey region's hard-earned recovery in employment is being overshadowed by ongoing job losses in certain sectors and the prospect of moderating growth in the United States as a whole. Fortunately, several positive trends are bolstering the region's employment picture. Strength in the services sector, a falloff in restructuring, and gains in income point to continuing--though modest--regional job growth in 1996.
Report
Stock market valuation indicators: is this time different?
Record low dividend yields and record high market-to-book ratios in recent months have led many market watchers to conclude that these indicators now behave differently from how they have in the past. This paper examines the relationship between traditional market indicators and stock performance, and then addresses two popular claims that the meaning of these indicators has changed in recent years. The first is that dividend yields are permanently lower now than in the past because firms have increased their use of share repurchases as a tax-advantaged substitute for dividends. The second ...
Report
On bounding credit event risk premia
Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a ?contagious? response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk ...