Proliferation of traded derivatives that relate to the same underlying—such as stocks, bonds, and credit default swaps (CDS) all tied to the value of an underlying firm—raises questions about which instrument leads the adjustment to a new equilibrium when information enters the market. In this article, the authors explore the issue of using CDS, bonds, and stocks of 10 financial firms before and during the crisis of 2008. Using a cointegration framework, they calculate each security’s contribution to overall price discovery. They find the stock market to be the most informative, followed by the CDS market, with the bond market least of all. Before the crisis period, about two-thirds of price discovery occurred in the equity market and about one-quarter in the CDS market. From fall 2007 through 2008, however, the influence from stocks dropped to about 50%, while the CDS market’s contribution increased to close to 40%.

This paper investigates asset pricing in a three-period overlapping generations (OLG) model economy where each generation lives as young, middle-aged and old. There is one perishable consumption good in the economy and two types of traded securities in the capital market: a bond and a share of equity. Implications for asset pricing and security returns of an increasing risk aversion are explored by allowing each agent's coefficient of relative risk aversion to vary with his age; the middle-aged consumer has a higher aversion to risk than the young and the old consumers are more risk averse than the middle-aged ones. Our model produces high equity premium without requiring very large levels of consumer risk aversion; a result more consistent with the U.S. data. We further modify our model to reflect the U.S. demographic trend of an increasing share of older age group. This new specification generates an even higher equity premium and a lower risk-free rate of return with an added desirable result of a lower standard deviation for the risk premium.

According to the Federal Reserve of the United States, in the second quarter of 2024, American credit card debt reached USD 1.14 trillion, the highest balance ever recorded. In an age of high-interest, complex credit cards, how does financial literacy affect credit card debt repayment? Also, how could financial literacy and education stop the rise in credit card debt in America? To answer these questions, we use microdata from the latest wave of the Survey of Consumer Finances for 2022. We aim to capture the likelihood of credit card repayment behaviors related to the monthly balances owed by 3865 credit card holders. We consider three categories of self-reported credit card payoff behavior: hardly ever, sometimes, and always or almost always. Given the ordinal nature of our outcome variable, we perform a series of likelihood-ratio and Brant tests to assess the assumption of the proportionality of odds across response categories. Following the failure of the tests, we conclude with the selection of a generalized ordered logit/partial proportional odds model that allows us to relax the parallel lines constraint for those variables for which it is not justified. In our logistic regressions, we account for a comprehensive set of demographic characteristics, and from our results, we highlight the following: For credit card holders with low financial literacy, we find that the odds of moving to a higher category of payoff behavior are 21% and significantly lower than those of high financial literacy respondents. Further, for college-educated card holders, the odds of paying off always or almost always versus sometimes and hardly ever are 2.49 times and significantly greater than the odds for credit card holders without a college education. Credit card holders who are minority group members, female, under 45, have dependents, or earn less than USD 50,000 demonstrate a tendency for poor credit card payoff behavior. In our conclusion, we discuss how to improve credit card repayments. We stress the importance of monitoring people closely. We also aim to provide better financial advice to certain groups. Lastly, we present a more realistic approach to building and sustaining financial literacy.

This paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agent's coefficient of relative risk aversion to vary with the underlying economy's growth rate. Existence of equilibrium is proved and its asymptotic properties analyzed. This generalization leads to level dependent marginal rates of substitution, a property that sharply distinguishes this model from the standard construct. For very low coefficients of relative risk aversion, the equilibrium risk free and risky security returns are demonstrated to have volatilities and an associated equity premium that substantially exceed what is found in the data. This provides a contrasting perspective on the classic "equity premium puzzle."