Interest rate term structure estimation with exponential splines: a note

Article Abstract:

Exponential spline functions have been developed previously as models of the interest rate term structure, with it claimed that these models are better than polynomial spline models. It is shown that exponential spline term structure estimates are no more stable than estimates from polynomial spline models; that data transformations implicit in the exponential spline model often condition the data, making it difficult to acquire approximations inspiring confidence; and that the exponential spline model's asymptotic properties often are unrealistic. It is concluded that estimation using exponential splines is no more convenient that with polynomial splines, and that much the same estimates of the interest rate term structure are given by both.

Interest rates

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Reformulating tax shield valuation: a note

Article Abstract:

In the absence of agency costs and personal taxes, standard financial theory leads to the conclusion that the dollar amount of a firm's debt contributes to its value in proportion to its tax rate, with this derived by assuming that incremental debt is permanent. It is shown here that the marginal value of debt financing is considerably lower than the corporate tax rate when the company acts to maintain a constant market value leverage ratio. An unlevering procedure consistent with the assumption of a constant leverage ratio is presented to contrast with the unlevering procedure for observed equity betas derived under the assumption of permanent debt established by earlier research.

Taxation, Corporate taxes, Tax administration and procedure, Tax administration, Corporations, Debt

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Divergence of opinion in complete markets: a note

Article Abstract:

An Arrow-Debreu model with agents with various subjective probabilities is considered, with it shown that asset prices will generally depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature. In cases in which all agents have identical preferences, assets with 'more dispersed' subjective probabilities will be priced lower than assets with less dispersed subjective probabilities as long as risk aversion does not decrease too quickly. The condition seems likely to be met in practice, leading to increased dispersion of beliefs generally being associated with reduced asset prices in specific Arrow-Debreu equilibria.

Research, Capital assets, Probabilities, Probability theory

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