The Journal of Finance

Swap Rates and Credit Quality

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02712.x

DARRELL DUFFIE, MING HUANG

This article presents a model for valuing claims subject to default by both contracting parties, such as swaps and forwards. With counterparties of different default risk, the promised cash flows of a swap are discounted by a switching discount rate that, at any given state and time, is equal to the discount rate of the counterparty for whom the swap is currently out of the money (that is, a liability). The impact of credit‐risk asymmetry and of netting is presented through both theory and numerical examples, which include interest rate and currency swaps.

Mental Accounting, Loss Aversion, and Individual Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00367

Nicholas Barberis, Ming Huang

We study equilibrium firm‐level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.