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In finance, default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity. A national or sovereign default is the failure or refusal of a government to repay its national debt.
Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance.
In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations with forward rate agreements (FRAs), and with zero coupon swaps (ZCSs).
The London Inter-Bank Offered Rate was an interest rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. It is the primary benchmark, along with the Euribor, for short-term interest rates around the world. Libor was phased out at the end of 2021, and market participants are being encouraged to transition to risk-free interest rates such as SOFR and SARON.
Credit risk is the possibility of losing a lender holds due to a risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants.
In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD SOFR +0.20%.
An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized by a specified pool of underlying assets.
Fixed-income arbitrage is a group of market-neutral-investment strategies that are designed to take advantage of differences in interest rates between varying fixed-income securities or contracts. Arbitrage in terms of investment strategy, involves buying securities on one market for immediate resale on another market in order to profit from a price discrepancy.
Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to mitigate them. See Finance § Risk management for an overview.
In finance, a currency swap is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. It has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps (FXSs).
Kenneth Jan Singleton is an American economist. He is a leading figure in empirical financial economics, and a faculty member at Stanford University. As the Adams Distinguished Professor of Management, Emeritus at Stanford Graduate School of Business, Singleton teaches a variety of degree courses in finance.
Lars Peter Hansen is an American economist. He is the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the Booth School of Business, at the University of Chicago and a 2013 recipient of the Nobel Memorial Prize in Economics.
The Jarrow–Turnbull model is a widely used "reduced-form" credit risk model. It was published in 1995 by Robert A. Jarrow and Stuart Turnbull. Under the model, which returns the corporate's probability of default, bankruptcy is modeled as a statistical process. The model extends the reduced-form model of Merton (1976) to a random interest rates framework.
The following outline is provided as an overview of and topical guide to finance:
Steven Eugene Shreve is a mathematician and a University Professor Emeritus in the Department of Mathematical Sciences at Carnegie Mellon University. He was previously the Orion Hoch Professor of Mathematical Sciences, which he held from 2006 until his retirement. Shreve is also the author of several major books on the mathematics of financial derivatives.
Lasse Heje Pedersen is a Danish financial economist known for his research on liquidity risk and asset pricing. He is Professor of Finance at the Copenhagen Business School. Before that, he held the position of a Professor of Finance and Alternative Investments at the New York University Stern School of Business. He has also served in the monetary policy panel and liquidity working group at the Federal Reserve Bank of New York and is a principal at AQR Capital Management.
The Merton model, developed by Robert C. Merton in 1974, is a widely used "structural" credit risk model. Analysts and investors utilize the Merton model to understand how capable a company is at meeting financial obligations, servicing its debt, and weighing the general possibility that it will go into credit default.
Jun Pan is the SAIF Chair Professor of Finance at the Shanghai Advanced Institute of Finance (SAIF) at Shanghai Jiao Tong University. She is an editor at the Review of Finance and an associate editor at the Journal of Finance.
SOFR Academy, Inc. is a U.S.-based economic education and market information provider. In connection with global reference rate reform and the transition away from the London Interbank Offered Rate (LIBOR), the firm operationalized benchmark credit spreads US-dollar Across-the-curve credit spread indices (AXI) that can be referenced in lending products in conjunction with the Secured Overnight Financing Rate (SOFR) to mitigate mismatches for financial institutions between their assets and liabilities in times of market stress thereby promoting their ability to provide credit.
References
- ↑ Essays in monetary policy and asset pricing
- ↑ "Yilin (David) Yang".
- ↑ "Darrell Duffie, Graduate School of Business, Stanford University".
- ↑ "Darrell Duffie, Graduate School of Business, Stanford University".
- ↑ Darrell Duffie (27 January 2010). Dynamic Asset Pricing Theory: Third Edition. Princeton University Press. ISBN 978-1-4008-2920-0.
- ↑ Darrell Duffie; Kenneth J. Singleton (12 January 2012). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. ISBN 978-1-4008-2917-0.
- ↑ CV
