On the term structure of default premia in the Swap and Libor markets

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. While 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, Sundares and Wang (1993)) this is counter-factual. Here, we propose a simple model of the (complex) 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 swaps should bear less default risk. In fact, we assume 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.Credit risk; asset pricing; international finance

Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology

We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Even though the state of the economy is fully described by a one-factor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regime-switching process, the regime being an investment `proximity' indicator. The resulting equilibrium oil price exhibits mean-reversion and heteroscedasticity. Further, the risk premium for exposure to commodity risk is time-varying, positive in the far-from-investment regime but negative in the near-investment regime. Further, our model captures many of the stylized facts of oil futures prices, such as backwardation and the `Samuelson effect.' The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously. We estimate our model using the Simulated Method of Moments with economic aggregate data and crude oil futures prices. The model successfully captures the first two moments of the futures curves, the average non-durable consumption-output ratio, the average oil consumption-output and the average real interest rate. The estimation results suggest the presence of convex adjustment costs for the investment in new oil wells. We also propose and test a linear approximation of the equilibrium regime-shifting dynamics implied by our model, and test its empirical implication for time-varying risk-premia.

Can standard preferences explain the prices of out-of-the-money S&P 500 put options?

The 1987 stock market crash occurred with minimal impact on observable economic variables (e.g., consumption), yet dramatically and permanently changed the shape of the implied volatility curve for equity index options. Here, we propose a general equilibrium model that captures many salient features of the U.S. equity and options markets before, during, and after the crash. The representative agent is endowed with Epstein-Zin preferences and the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. In reaction to a market crash, the agent updates her beliefs about the distribution of the jump component. We identify a realistic calibration of the model that matches the prices of shortmaturity at-the-money and deep out-of-the-money S&P 500 put options, as well as the prices of individual stock options. Further, the model generates a steep shift in the implied volatility ‘smirk’ for S&P 500 options after the 1987 crash. This ‘regime shift’ occurs in spite of a minimal impact on observable macroeconomic fundamentals. Finally, the model’s implications are consistent with the empirical properties of dividends, the equity premium, as well as the level and standard deviation of the risk-free rate. Overall, our findings show that it is possible to reconcile the stylized properties of the equity and option markets in the framework of rational expectations, consistent with the notion that these two markets are integrated.Money ; Macroeconomics ; Pricing

Portfolio Choice over the Life-Cycle in the Presence of 'Trickle Down' Labor Income

Empirical evidence shows that changes in aggregate labor income and stock market returns exhibit only weak correlation at short horizons. As we document below, however, this correlation increases substantially at longer horizons, which provides at least suggestive evidence that stock returns and labor income are cointegrated. In this paper, we investigate the implications of such a cointegrated relation for life-cycle optimal portfolio and consumption decisions of an agent whose non-tradable labor income faces permanent and temporary idiosyncratic shocks. We find that, under economically plausible calibrations, the optimal portfolio choice for the young investor is to take a substantial {\em short} position in the risky portfolio, in spite of the large risk premium associated with it. Intuitively, this occurs because the cointegration effect makes the present value of future labor income flows `stock-like' for the young agent. However, for older agents who have shorter times-to-retirement, the cointegration effect does not have sufficient time to act, and the remaining human capital becomes more `bond-like.' Together, these effects create a hump-shaped optimal portfolio decision for the agent over the life cycle, consistent with empirical observation.

Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options

Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become %u2018expensive%u2019 relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has %u2018standard preferences%u2019 and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the %u2018volatility smirk%u2019 can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. We identify a realistic calibration of the model that simultaneously matches the empirical properties of dividends, the equity premium, the prices of both at-the-money and deep out-of-the-money puts, and the level of the risk-free rate. A more challenging question (that to our knowledge has not been previously investigated) is whether one can explain within a standard preference framework the stark regime change in the volatility smirk that has maintained since the 1987 market crash. To this end, we extend the model to a Bayesian setting in which the agent updates her beliefs about the average jump size in the event of a jump. Note that such beliefs only update at crash dates, and hence can explain why the volatility smirk has not diminished over the last eighteen years. We find that the model can capture the shape of the implied volatility curve both pre- and post-crash while maintaining reasonable estimates for expected returns, price-dividend ratios, and risk-free rates.

Portfolio choice over the life-cycle when the stock and labor markets are cointegrated

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.Portfolio management ; Stock market ; Labor market

Can Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatility

Most affine models of the term structure with stochastic volatility (SV) predict that the variance of the short rate is simultaneously a linear combination of yields and the quadratic variation of the spot rate. However, we find empirically that the A1(3) SV model generates a time series for the variance state variable that is strongly negatively correlated with a GARCH estimate of the quadratic variation of the spot rate process. We then investigate affine models that exhibit "unspanned stochastic volatility (USV)." Of the models tested, only the A1(4) USV model is found to generate both realistic volatility estimates and a good cross-sectional fit. Our findings suggests that interest rate volatility cannot be extracted from the cross-section of bond prices. Separately, we propose an alternative to the canonical representation of affine models introduced by Dai and Singleton (2001). This representation has several advantages, including: (I) the state variables have simple physical interpretations such as level, slope and curvature, (ii) their dynamics remain affine and tractable, (iii) the model is econometrically identifiable, (iv) model-insensitive estimates of the state vector process implied from the term structure are readily available, and (v) it isolates those parameters which are not identifiable from bond prices alone if the model is specified to exhibit USV.

La politique culturelle des villes québécoises face à la récente réforme municipale

L’article traite de l’impact des fusions municipales sur le secteur culturel municipal dans les huit villes de plus de 100 000 habitants, résultat des fusions de 2002, soit celles de Québec, Montréal, Sherbrooke, Gatineau, Lévis, Longueuil, Trois-Rivières et Saguenay. L’examen des compétences en matière culturelle des huit villes fusionnées ainsi que l’examen de leurs politiques culturelles permettent de repérer la présence de liens de renforcement mutuel entre la réorganisation municipale et le domaine culturel. Plus encore, il semblerait que la restructuration municipale ait permis de poser les bases d’un développement incrémental et prometteur du secteur culturel municipal, propres à chacune des villes.This paper discusses the impact of the municipal mergers of 2002 on public policies in the area of the municipal cultural sector for the eight Quebec cities of more than 100,000 inhabitants. An examination of cultural responsibilities and activities in Quebec City, Montreal, Sherbrooke, Gatineau, Lévis, Longueuil, Trois-Rivières and Saguenay, on the one hand, and an analysis of their cultural policies, on the other, leads us to conclude that the links between public cultural initiatives and the municipal territories were weak until the municipal reorganisation. The new regional reality of each city will help foster the development of the municipal cultural sector

Caractérisation du domaine C-terminal de l'ARN polymérase II et de la phosphatase Glc7 dans la terminaison transcriptionnelle chez Saccharomyces cerevisiae

La terminaison transcriptionnelle de l’ARN polymérase II (ARNPII) est l’étape de la transcription la moins bien comprise. Deux modèles ont toutefois été proposés pour la levure Saccharomyces cerevisiae. Pour les gènes codants, il est suggéré que la phosphorylation de la Ser2 du domaine C-terminal (CTD) de l’ARNPII, en concomitance avec la déphosphorylation de la Tyr1, permet le recrutement des facteurs de terminaison Rtt103 et Pcf11 (complexe CPF-CF). Pour les ARN non-codants, la terminaison nécessiterait la phosphorylation de la Ser5 du CTD pour le recrutement du facteur de terminaison Nrd1 (complexe Nrd1-Nab3-Sen1 (NNS)). Même si le rôle du complexe CPF-CF est souvent présenté comme étant exclusif aux gènes codants, il a aussi été démontré que certains de ses constituants sont impliqués dans la terminaison des ARN non-codants. Il a notamment été proposé qu’une des phosphatases du CPF-CF, Glc7, soit impliquée dans l’activation de l’hélicase Sen1. Ces différents modèles de la terminaison transcriptionnelle comportent, cependant, des limitations. En effet, les mécanismes impliquant le CTD sont basés principalement sur l’utilisation de mutants des kinases et des phosphatases du CTD, car les mutants du domaine sont pour la plupart létaux. Puis, pour ce qui est du rôle de Glc7 dans l’activation de Sen1, aucune évidence in vivo ne le démontre. Le projet principal de mon doctorat consistait donc à réévaluer, par des approches génomiques, l’implication du CTD de l’ARNPII dans la terminaison à l’aide de différents systèmes d’expression ectopique rendant possible l’utilisation de mutants du CTD. Comme attendu, les résultats obtenus démontrent des défauts globaux de terminaison aux gènes codants avec les mutants de la Ser2 et de la Thr4. Étonnamment, aucun défaut de terminaison n’est observé aux ARN non-codants avec le mutant de la Ser5. Les défauts de terminaison à ces ARN sont plutôt observés avec le mutant de la Tyr1, tandis que seulement un nombre limité de gènes codants est affecté par ce mutant. De plus, nous avons découvert que la Tyr1 est essentielle pour l’établissement de pauses de l’ARNPII dans la région 5’ des gènes et que ces évènements sont essentiels à une terminaison efficace aux ARN non-codants à l’aide du NNS. Le deuxième projet consistait, quant à lui, à déterminer le rôle de la déphosphorylation de Sen1 par la phosphatase Glc7. Les résultats obtenus démontrent que Sen1 est une enzyme stable, mais que cette stabilité dépend de Glc7. De plus, l’effet de Glc7 sur Sen1 est dépendant de l’activité catalytique de Glc7 et du protéasome. Enfin, ce rôle de Glc7 est indépendant de son interaction avec les complexes CPF-CF ou APT. En somme, les résultats obtenus durant mes études permettent d’effectuer une mise à jour importante quant au rôle que joue le CTD dans la terminaison transcriptionnelle et celui que joue Glc7 dans la terminaison des ARN non-codants.Transcriptional termination of RNA polymerase II (RNAPII) is the least understood step of transcription. Two models have been proposed in Saccharomyces cerevisiae. At protein-coding genes, it is proposed that the phosphorylation of Ser2 of the RNAPII C-terminal domain (CTD), in concomitance with the dephosphorylation of Tyr1, triggers the recruitment of termination factors Rtt103 and Pcf11 (CPF-CF complex). At non-coding RNAs, it is proposed that Ser5 phosphorylation is required for Nrd1 recruitment (Nrd1-Nab3-Sen1 complex (NNS)). Although the CPF-CF complex is often presented as exclusive to protein-coding genes, some of its components have also been shown to be involved in the termination of non-coding RNAs. Notably, it has been proposed that one of the two phosphatases present in CPF-CF, Glc7, is involved in the activation of the helicase Sen1. These different models of termination have, however, limitations. Indeed, the mechanisms involving the CTD are mainly based on the use of mutants of CTD kinases and phosphatases since most CTD mutants are sick or lethal. In addition, the role of Glc7 in the activation of Sen1 has not been demonstrated in vivo. The main project of my Ph.D. was therefore to reinvestigate, using genomic approaches, the role of the RNAPII CTD in termination using different ectopic expression systems making possible the use of CTD mutants. As expected, the results obtained demonstrate a global termination defect at protein-coding genes with the Ser2 and Thr4 mutants. Surprisingly, however, no termination defect was observed at non-coding RNAs with the Ser5 mutant. Defects in non-coding RNA terminations were rather observed with the Tyr1 mutant, whereas only a limited number of protein-coding genes was affected in this mutant. In addition, we found that Tyr1 is essential for RNAPII pausing in the 5' region of genes and that these events are essential to allow efficient NNS-dependent termination. The second project consisted in determining the role of Sen1 dephosphorylation by the phosphatase Glc7. The results obtained demonstrate that Sen1 is a stable enzyme, but also that its stability requires Glc7. In addition, the effect of Glc7 on Sen1 is dependent on the catalytic activity of Glc7 and is proteasome-dependent. Finally, this role of Glc7 is independent of its interaction with CPF-CF or APT. In conclusion, the results obtained during my PhD allowed for an important update of the role of the CTD in the transcriptional termination and the mechanism through which Glc7 regulates the termination of non-coding RNAs