This thesis studies the pricing of Treasury bonds, the pricing of corporate bonds and
the modelling of portfolios of defaultable debt. By drawing on the related literature,
Chapter 1 provides economic background and motivation for the study of each of these
topics.
Chapter 2 studies the use of Gaussian affine dynamic term structure models (GDTSMs)
for forming forecasts of Treasury yields and conditional decompositions of the yield
curve into expectation and risk premium components. Specifically, it proposes market
prices of risk that can generate bond price time series that are consistent with the
important empirical result of Cochrane and Piazzesi (2005), that a linear combination
of forward rates can forecast excess returns to bonds. Since the GDTSM here falls into
the essentially affine class (Duffee (2002)), it is analytically tractable.
Chapter 3 studies conditional risk premia in a commonly applied default intensity based
model for pricing corporate bonds. Here, I refer to such models as completely affine
defaultable dynamic term structure models (DDTSMs). There are two main contributions. First, I show that completely affine DDTSMs imply that the compensation for
the risk associated with shocks to default intensities (the credit spread risk premium)
is related to the volatility of default intensities. Second, I run regressions to show that
this relationship holds in a set of corporate bond data.
Finally, Chapter 4 proposes a new dynamic model for default rates in large debt port-
folios. The model is similar in principle to Duffie, Saita, and Wang (2007) and Duffie,
Eckner, Horel, and Saita (2009) in that the default intensity depends on the observed
macroeconomic state and unobserved frailty variables. However, the model is designed
for use with more commonly available aggregate, rather than individual, default data.
Fitting the model to aggregate charge-off rates in US corporate, real-estate and non-
mortgage retail sectors, it is found that interest rates, industrial production and unemployment rates have quantitatively plausible effects on aggregate default rates
