Robert S. Goldstein

The Determinants of Credit Spread Changes

Using straight industrial bonds with quoted prices, we investigate the determinants of credit spread changes. The variables that should in theory determine credit spread changes in fact have limited explanatory power. Further, the residuals from this first-pass regression are highly cross-correlated, and principal components analysis strongly suggests they are driven by a single common factor. We investigate several macro-economic and financial variables as candidate proxies for this factor. We cannot, however, find any set of variables which explain this common systematic factor. Our results suggest the corporate bond market is a segmented market driven by corporate bond specific supply/demand shocks.

Do Credit Spreads Reflect Stationary Leverage Ratios

Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean-reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low-leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative-grade debt, consistent with recent empirical findings. Copyright The American Finance Association 2001.

Pricing Swaptions within the Affine Framework

Valuation theory for the most widely used interest rate derivatives, such as swaps, bond options, and caps and floors, is highly developed. But adapting the theory for use in the field is not trivial. Several stochastic factors at least are needed to approximate the empirical term structure, with which the model must be consistent. Affine models offer a general multifactor structure with good mathematical properties. However, if the factors follow standard probability processes, Gaussian or Cox-Ingersoll-Ross square root diffusions, for instance, the probability distributions for future bond prices, swap rates, and so on, will not have common forms. Valuing interest rate derivatives typically requires burdensome numerical solution of multivariate integrals, which limits the number of stochastic factors that can be considered, as well as the accuracy with which any given solution can be computed. Collin-Dufresne and Goldstein present a new technique for pricing interest rate derivatives in a much more efficient manner. Within an affine framework, the probability density for a bond price will not normally exist in closed-form, but all of its moments will. An Edgeworth expansion using a small number of these analytic moment expressions yields an approximation to the density function that is both very accurate and extremely fast to compute. Pricing accuracy and computation speed are increased by many orders of magnitude for a single option, and little additional computation is needed to price multiple contracts with differing strikes.

Effects of information-processing demands on physiological response patterns

The present study investigated the effects of increased attentional and encoding/rehearsal demands on a number of physiological measures. Encoding/rehearsal demands were varied by manipulating the number of letters (1, 3, or 5) comprising a briefly presented set that the subject was instructed to encode, retain, and, 5 s later, compare with a single test letter. Attentional demands were varied by presenting the subject with a cue stimulus (the numeral 1, 3, or 5) 5s prior to the presentation of the letter set, informing the subject of the number of letters contained therein. The physiological measures recorded were heart rate, eyeblinks, “probe-evoked” potentials sampled from the intervals preceding and following the letter set, and “task-evoked” potentials elicited by the cue, memory set, and test stimuli. Unique patterns of physiological activity occurred in the intervals preceding and following the memory set. In the interval preceding the memory set, where attentional demands were varied by set size, probe ERP P1-N1 amplitude increased with set size. In the subsequent interval, where encoding and rehearsal demands were varied, probe ERP N1-P2 amplitude declined with increasing set size. There was also evidence for interval and set-size effects on heart rate, blink rate, and task ERPs. These results have implications for multiple-resource theories of attention.

Long-term behavioral and electrophysiological changes associated with lead exposure at different stages of brain development in the rat

The present investigation was conducted to assess the behavioral and electrophysiological impairments exhibited by adult male rats as a function of the developmental stage during which lead exposure occurred. Dams were given either a lead acetate (0.3%) or a control drinking solution during days 16-23 of gestation, days 1-8 or days 9-16 of nursing. The temporal and spatial activity patterns exhibited by gestationally exposed offspring in the open field between 42-45 days of age was distinguished from all other groups by the absence of a decrement in peripheral field activity across days and by increased exploration of the center field. Although open field activity proved sensitive to the timing of lead exposure, power spectral analyses of hippocampal and cortical EEG activity at 70-72 days of age revealed that lead selectively depressed 6-7 Hz energy in the hippocampus, independent of the developmental stage of exposure; cortical EEG and other hippocampal theta frequencies were unaffected. The differential sensitivity of open field activity and select hippocampal theta frequencies to the timing of lead administration suggests that the identification of toxic consequences depends on the function assessed and the developmental stage during which lead exposure occurred.

Effect of task difficulty and interstimulus interval on blink parameters

The effects of task difficulty and interstimulus interval (ISI) on blink rate, blink latency and blink duration, were studied in a modified Sternberg memory task in which either two or six characters were to be memorized. Stimuli were presented in ISI blocks at either 5.3 or 9.3 s (SOAs of 6 or 10 s). While blink rate and blink duration declined prior to each stimulus, the difficulty of the expected task (the length of the memory set) did not affect the rate of decline or the final prestimulus level. Concerning ISI, blink rate declined more rapidly during shorter ISIs but the final prestimulus level, as was the case with task difficulty, was unaffected by the ISI duration. Presentation of the 6-character memory set produced a marked immediate inhibition of blinking. The data suggest that the encoding of visual stimuli is more akin to processes invoked in preparation for input than to ensuing processing stages since both encoding as well as preparation are accompanied by inhibition of blinking.

On the Term Structure of Interest Rates in the Presence of Reflecting and Absorbing Boundaries

To preclude arbitrage, nominal interest rates must remain non-negative. Researchers have captured this feature by modeling the spot rate with volatility structures that vanish as the spot rate tends to zero. However, such volatility structures are in conflict with empirical evidence; volatility can remain relatively large even at low interest rates. In this paper, we investigate the term structure of interest rates for spot rate processes subject to reflecting and absorbing boundaries. Such models preclude negative rates, are consistent with large volatility at low rates, and admit closed form solutions for both bond and European-type derivative security prices. Below, appropriate boundary conditions are derived for spot rates processes that are subject to reflecting and absorbing boundaries. Although it can be demonstrated that spot rate processes with reflecting boundaries can be supported within a general equilibrium framework, we show that reflecting boundaries cannot be placed upon forward rate dynamics without generating arbitrage opportunities. Closed-form bond price solutions for select models are obtained.

Effect of food deprivation on hypothalamic self-stimulation in stimulus-bound eaters and non-eaters.

Abstract Previous studies concerned with the effects of food deprivation on hypothalamic self-stimulation were found wanting for lack of discrimination between feeding and nonfeeding sites. In the present study this omission was rectified which allowed the conclusion that food deprivation selectively potentiates the rewarding properties of hypothalamic stimulation at sites from which feeding can be elicited. The existence of a postdeprivation facilitation in both eaters and non-eaters reinforces the rationale for controlling this variable in studies designed to elucidate the neural substrates of consummatory behavior.

Endogenous Dividend Dynamics and the Term Structure of Dividend Strips

Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios. Under this policy, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. This framework also generates stock volatility that is higher than long-horizon dividend volatility, even with constant market prices of risk.

Effect of water deprivation and cues associated with water on the heart rate of the rat

Abstract Heart rate (HR) was recorded from rats prior to and during 10 cycles of adaptation to 0, 23.5 and 47.5 hr water deprivation schedules. Drinking was permitted in the last 5 min of each 10 min recording session during deprivation. Though the 23.5 hr group was excluded from the analysis due to a predeprivation artifact, their data agreed with that of the remaining groups reported. Results showed no difference in the 5 min predrink period between the 47.5 and the 0 hr deprived groups even after 4 deprivation cycles. As a function of repeated exposures to the situation, the HR of the 47.5 hr group increasingly exceeded that of the 0 hr group resulting in a significant groups X days interaction. During drinking a clear accelerative effect was noted in both deprived groups. The outcome was interpreted as being compatible with the theoretical position of Campbell in demonstrating the importance of cues associated with water in the activation of a deprived animal.