The Journal of Finance

On the Term Structure of Default Premia in the Swap and LIBOR Markets

Published: 6/2001,  Volume: 56,  Issue: 3  |  DOI: 10.1111/0022-1082.00357  |  Cited by: 169

Pierre Collin‐Dufresne, Bruno Solnik

Existing theories of the term structure of swap rates provide an analysis of the Treasury–swap spread based on either a liquidity convenience yield in the Treasury market, or default risk in the swap market. Although these models do not focus on the relation between corporate yields and swap rates (the LIBOR–swap spread), they imply that the term structure of corporate yields and swap rates should be identical. As documented previously (e.g., in Sun, Sundaresan, and Wang (1993)) this is counterfactual. Here, we propose a model of the default risk imbedded in the swap term structure that is able to explain the LIBOR–swap spread. Whereas corporate bonds carry default risk, we argue that swap contracts are free of default risk. Because swaps are indexed on “refreshed”‐credit‐quality LIBOR rates, the spread between corporate yields and swap rates should capture the market's expectations of the probability of deterioration in credit quality of a corporate bond issuer. We model this feature and use our model to estimate the likelihood of future deterioration in credit quality from the LIBOR–swap spread. The analysis is important because it shows that the term structure of swap rates does not reflect the borrowing cost of a standard LIBOR credit quality issuer. It also has implications for modeling the dynamics of the swap term structure.

Liquidity, Volume, and Order Imbalance Volatility

Published: 6/5/2023,  Volume: 78,  Issue: 4  |  DOI: 10.1111/jofi.13248  |  Cited by: 41

VINCENT BOGOUSSLAVSKY, PIERRE COLLIN‐DUFRESNE

We examine the dynamics of liquidity using a comprehensive sample of U.S. stocks in the post‐decimalization period. Motivated by a continuous‐time inventory model, we compute a high‐frequency measure of order imbalance volatility to proxy for the inventory risk faced by liquidity providers. We show that high‐frequency order imbalance volatility is an important driver of liquidity and explains the often positive time‐series relation between spread and volume for large stocks, which seems to run counter to most theoretical models. Furthermore, order imbalance volatility is priced in the cross‐section of stock returns.

Do Prices Reveal the Presence of Informed Trading?

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12260  |  Cited by: 304

PIERRE COLLIN‐DUFRESNE, VYACHESLAV FOS

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (1) activists select times of higher liquidity when they trade, and (2) activists use limit orders. We conclude that, when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.

Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates

Published: 9/16/2005,  Volume: 60,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2005.00799.x  |  Cited by: 364

JAIME CASASSUS, PIERRE COLLIN‐DUFRESNE

We characterize a three‐factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications. The model allows convenience yields to depend on spot prices and interest rates. It also allows for time‐varying risk premia. Both may induce mean reversion in spot prices, albeit with very different economic implications. Empirical results show strong evidence for spot‐price level dependence in convenience yields for crude oil and copper, which implies mean reversion in prices under the risk‐neutral measure. Silver, gold, and copper exhibit time variation in risk premia that implies mean reversion of prices under the physical measure.

Do Credit Spreads Reflect Stationary Leverage Ratios?

Published: 10/2001,  Volume: 56,  Issue: 5  |  DOI: 10.1111/0022-1082.00395  |  Cited by: 574

Pierre Collin‐Dufresne, Robert S. Goldstein

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 less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative‐grade debt, consistent with recent empirical findings.

Do Bonds Span the Fixed Income Markets? Theory and Evidence for Unspanned Stochastic Volatility

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00475  |  Cited by: 261

Pierre Collin‐Dufresne, Robert S. Goldstein

Most term structure models assume bond markets are complete, that is, that all fixed income derivatives can be perfectly replicated using solely bonds. How ever, we find that, in practice, swap rates have limited explanatory power for returns on at‐the‐money straddles—portfolios mainly exposed to volatility risk. We term this empirical feature unspanned stochastic volatility (USV). While USV can be captured within an HJM framework, we demonstrate that bivariate models cannot exhibit USV. We determine necessary and sufficient conditions for trivariate Markov affine systems to exhibit USV. For such USV models, bonds alone may not be sufficient to identify all parameters. Rather, derivatives are needed.

On the Relative Pricing of Long‐Maturity Index Options and Collateralized Debt Obligations

Published: 11/19/2012,  Volume: 67,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2012.01779.x  |  Cited by: 74

PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN, FAN YANG

We investigate a structural model of market and firm‐level dynamics in order to jointly price long‐dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out‐of‐sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are nonredundant assets that provide a unique window into the pricing of catastrophic risk.

Portfolio Choice over the Life‐Cycle when the Stock and Labor Markets Are Cointegrated

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01271.x  |  Cited by: 362

LUCA BENZONI, PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN

We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes “stock‐like.” However, for older agents with shorter times‐to‐retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more “bond‐like.” Together, these effects create hump‐shaped life‐cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.

Market Structure and Transaction Costs of Index CDSs

Published: 6/17/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12953  |  Cited by: 56

PIERRE COLLIN‐DUFRESNE, BENJAMIN JUNGE, ANDERS B. TROLLE

Despite regulatory efforts to promote all‐to‐all trading, the post–Dodd‐Frank index credit default swap market remains two‐tiered. Transaction costs are higher for dealer‐to‐client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low‐cost, low‐immediacy trading protocols. Dealer‐to‐client trades are nonanonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest that the market structure is a consequence of the characteristics of client trades: relatively infrequent, large, and differentially informed.

How Integrated are Credit and Equity Markets? Evidence from Index Options

Published: 1/9/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13300  |  Cited by: 24

PIERRE COLLIN‐DUFRESNE, BENJAMIN JUNGE, ANDERS B. TROLLE

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit‐risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility.

Dividend Dynamics and the Term Structure of Dividend Strips

Published: 5/11/2015,  Volume: 70,  Issue: 3  |  DOI: 10.1111/jofi.12242  |  Cited by: 113

FREDERICO BELO, PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN

Many leading asset pricing models are specified so that the term structure of dividend volatility is either flat or upward sloping. These models predict that the term structures of expected returns and volatilities on dividend strips (i.e., claims to dividends paid over a prespecified interval) are also upward sloping. However, the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their proposed dividend dynamics with processes that generate stationary leverage ratios. Under such policies, shareholders are forced to divest (invest) when leverage is low (high), which shifts risk from long‐ to short‐horizon dividend strips.

Identification of Maximal Affine Term Structure Models

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01331.x  |  Cited by: 101

PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN, CHRISTOPHER S. JONES

Building on Duffie and Kan (1996), we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation has more identifiable parameters than the “maximal” model of Dai and Singleton (2000). We implement this new representation for select three‐factor models and find that model‐independent estimates for the state vector can be estimated directly from yield curve data, which present advantages for the estimation and interpretation of multifactor models.

The Determinants of Credit Spread Changes

Published: 12/2001,  Volume: 56,  Issue: 6  |  DOI: 10.1111/0022-1082.00402  |  Cited by: 1619

Pierre Collin-Dufresn, Robert S. Goldstein, J. Spencer Martin

Using dealer's quotes and transactions prices on straight industrial bonds, we investigate the determinants of credit spread changes. Variables that should in theory determine credit spread changes have rather limited explanatory power. Further, the residuals from this regression are highly cross‐correlated, and principal components analysis implies they are mostly driven by a single common factor. Although we consider several macroeconomic and financial variables as candidate proxies, we cannot explain this common systematic component. Our results suggest that monthly credit spread changes are principally driven by local supply/demand shocks that are independent of both credit‐risk factors and standard proxies for liquidity.

Relationships Between the Two Sides of the Balance Sheet: A Canonical Correlation Analysis

Published: 9/1980,  Volume: 35,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1980.tb03514.x  |  Cited by: 32

JOHN D. STOWE, COLLIN J. WATSON, TERRY D. ROBERTSON

A Search‐Based Theory of the On‐the‐Run Phenomenon

Published: 5/9/2008,  Volume: 63,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2008.01360.x  |  Cited by: 270

DIMITRI VAYANOS, PIERRE‐OLIVIER WEILL

We propose a model in which assets with identical cash flows can trade at different prices. Infinitely lived agents can establish long positions in a search spot market, or short positions by first borrowing an asset in a search repo market. We show that short‐sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. That asset enjoys greater liquidity, a higher lending fee (“specialness”), and trades at a premium consistent with no‐arbitrage. We derive closed‐form solutions for small frictions, and provide a calibration generating realistic on‐the‐run premia.

Strategic Debt Service

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04812.x  |  Cited by: 316

PIERRE MELLA‐BARRAL, WILLIAM PERRAUDIN

When firms experience financial distress, equity holders may act strategically, forcing concessions from debtholders and paying less than the originally‐contracted interest payments. This article incorporates strategic debt service in a standard, continuous time asset pricing model, developing simple closed‐form expressions for debt and equity values. We find that strategic debt service can account for a substantial proportion of the premium on risky corporate debt. We analyze the efficiency implications of strategic debt service, showing that it can eliminate both direct bankruptcy costs and agency costs of debt.

Seasonality in the Risk‐Return Relationship: Some International Evidence

Published: 3/1987,  Volume: 42,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1987.tb02549.x  |  Cited by: 28

ALBERT CORHAY, GABRIEL HAWAWINI, PIERRE MICHEL

We report evidence of seasonality in the Fama and MacBeth estimate of the CAPM‐based risk premium in four stock exchanges: the NYSE and the London, Paris, and Brussels exchanges. Specifically, we found that, in Belgium and France, risk premia are positive in January and negative the rest of the year. There is no January seasonal in the U.K. risk premium. Instead, we observed in this country a positive April seasonal and a negative average risk premium over the rest of the year. In the U.S., the pattern of risk‐premium seasonality coincides with the pattern of stock‐return seasonality. Both are positive and significant only in January. We also found that the January risk premium in the U.S. is significantly larger than those observed in the European markets. Interestingly, the reported patterns of risk‐premium seasonality in European equity markets do not fully coincide with the observed patterns of stock‐return seasonality in these markets. For example, in the U.K., average stock returns are significant and positive in January and April, whereas the market risk premium is significantly positive only in April. A possible interpretation of this phenomenon is presented in the paper.

Longevity, Health, and Housing Risk Management in Retirement

Published: 8/25/2026,  Volume: ,  Issue:   |  DOI: 10.1111/jofi.70077  |  Cited by: 0

PIERRE‐CARL MICHAUD, PASCAL ST‐AMOUR

Annuities, long‐term care insurance, and reverse mortgages remain puzzlingly unpopular to manage post‐retirement longevity, health, and housing price risks. We use a flexible life‐cycle model structurally estimated with a unique stated‐preference survey experiment of Canadian households to understand why. Key factors include high risk aversion, concern over long‐run risks, strong discounting of valuation in disability states, imperfect housing substitutability, and bequest motives. The remaining disinterest is accounted for by information frictions and inertia. We also document evidence of public insurance crowding out, spousal co‐insurance, and responsiveness to product bundling.

An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

Published: 12/1995,  Volume: 50,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1995.tb05192.x  |  Cited by: 860

BRUNO BIAIS, PIERRE HILLION, CHESTER SPATT

As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases).

Hedging and Joint Production: Theory and Illustrations

Published: 5/1980,  Volume: 35,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1980.tb02180.x  |  Cited by: 116

RONALD W. ANDERSON, JEAN‐PIERRE DANTHINE

Transparency in the Financial System: Rollover Risk and Crises

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12270  |  Cited by: 158

MATTHIEU BOUVARD, PIERRE CHAIGNEAU, ADOLFO DE MOTTA

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank‐specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.

How Debit Cards Enable the Poor to Save More

Published: 5/7/2021,  Volume: 76,  Issue: 4  |  DOI: 10.1111/jofi.13021  |  Cited by: 107

PIERRE BACHAS, PAUL GERTLER, SEAN HIGGINS, ENRIQUE SEIRA

We study an at‐scale natural experiment in which debit cards were given to cash transfer recipients who already had a bank account. Using administrative account data and household surveys, we find that beneficiaries accumulated a savings stock equal to 2% of annual income after two years with the card. The increase in formal savings represents an increase in overall savings, financed by a reduction in current consumption. There are two mechanisms. First, debit cards reduce transaction costs of accessing money. Second, they reduce monitoring costs, which led beneficiaries to check their account balances frequently and build trust in the bank.

Sequential Search for Corporate Bonds

Published: 8/10/2026,  Volume: ,  Issue:   |  DOI: 10.1111/jofi.70068  |  Cited by: 0

MAHYAR KARGAR, BENJAMIN LESTER, SÉBASTIEN PLANTE, PIERRE‐OLIVIER WEILL

Customers in over‐the‐counter (OTC) markets must find a counterparty to trade. Little is known about this process, however, because existing data consist of transaction records, which only reveal the outcome of a search. Using data from a trading platform for corporate bonds, we unpack the search process. We analyze how long it takes customers to trade and how dealers' offers evolve across repeated inquiries. We estimate that it takes two to three days to complete a transaction after an unsuccessful attempt, with substantial variation across trade and customer characteristics. Our analysis offers insights into the sources of trading delays in OTC markets.