Browsing by Subject "Credit risk"

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    Essays on asset pricing.
    (2011-06) Yang, Fan
    My dissertation investigates two important puzzles in derivatives markets. In Chapter one, I identify a “slope” factor in the cross section of commodity futures returns. Low-basis commodity futures have higher loadings on this factor than highbasis commodity futures. This slope factor and a level factor — an index of commodity futures — jointly explain most of the average futures returns in commodity futures portfolios sorted by basis. The risk price of this new factor is about 10% per annum. More importantly, I find that this factor is highly correlated with investment shocks, which represent the technological progress in producing new capital. Then, I investigate a competitive dynamic equilibrium model of commodity production to endogenize this correlation. The model reproduces the cross-sectional futures returns. Other major implications of the model are supported by data as well. Chapter two is coauthored with Pierre Collin-Dufresne and Robert Goldstein. We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 options and tranche spreads on the five-year CDX index. We demonstrate the importance of calibrating the model to match the entire term structure of CDX index spreads because it contains pertinent information regarding the timing of expected defaults and the specification of idiosyncratic dynamics. Our model matches the time series of tranche spreads well, both before and during the financial crisis, thus offering a resolution to the puzzle reported by Coval, Jurek and Stafford (2009a).