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Do Credit Spreads Reflect Stationary Leverage Ratios

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  • Pierre Collin-Dufresne
  • Robert Goldstein

Abstract

We identify a class of term structure models possessing a generalized affine-structure that significantly extends the class studied by Duffie, Pan, and Singleton (2000). For this class of models, which includes both infinite-state-variable (ie HJM-type) and infinite-factor (random field) models, closed-form solutions for bond-option prices are obtained. Two special cases are investigated. First, a parsimonious model of `true' stochastic volatility is proposed, where innovations in derivative securities cannot be hedged by innovations in bond prices. Empirical support for this type of model is presented. Second, a two-factor arbitrage-free model of a long-rate, similar in spirit to that proposed by Brennan and Schwartz (1979, 1982), is introduced.

Suggested Citation

  • Pierre Collin-Dufresne & Robert Goldstein, "undated". "Do Credit Spreads Reflect Stationary Leverage Ratios," GSIA Working Papers 2000-E14, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:365
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