In this article, we aim to show that most of the recent multifactor speci®cations of the term structure can be traced back to a common general equilibrium model, based on an economy of the Cox, Ingersoll and Ross type. This base model of the term structure has a very general form and includes both square root and Gaussian dynamics of the underlying state variables. We establish a direct link among the state variables used in the different speci®cations of many multifactor models and analyse the structure of the resultant implied relationships. This technique has relevant implications from a practical point of view, as it can allow one to recover from the estimated coef®cients of one model the implied value of the coef®cients of other models. Moreover, it provides a way of recovering from the term structure the values of such unobservable variables as the real short rate and the expected in¯ation rate.(J.E.L.: E43, G12).

There have been many attempts at solving the problem of determining the ‘fundamental value’ of the credit spread of a government bond. This is particularly important in the case of Eurozone, where the ECB intervention on the government bonds' market is allowed only if the ‘spread’ paid by the sovereign issuer is higher than the one justified by ‘fundamentals’. The complication in determining what is a fair level of the spread stems from the fact that public debt sustainability depends on many factors, amongst them the level of interest rates paid. This sort of circularity between debt sustainability and interest rate paid by the sovereign issuer is the major source of complexity. This paper highlights a possible solution inside a simplified framework resembling the peculiar institutional settings of the Eurozone: no possibility of money‐financing, the famous Maastricht Treaty 3–60% parameters, availability of financial assistance programme subordinated to the acceptance of consolidation plans for public finances. We obtain the possibility of multiple equilibria for the credit spread, whose stability can be analysed through a phase diagram. The dynamics of the model is derived from probabilistic assumptions about the public debt process. It does not depend on ‘loss’ functions devised to model the strategic relationship between debtors and creditors, as in previous literature on public debt sustainability. Dynamic properties of equilibria can be used to gain insight on what does it mean ‘good’ or ‘bad’ equilibrium from the perspective of the ECB.

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Basket credit derivatives are those financial contracts whose pay–out depends on the credit events (‘failure to pay’, ‘default’, etc.) characterizing a portfolio of bonds or loans over a determined time horizon. We have two main categories of basket credit derivatives. The first is characterized by a pay–out depending on the temporal ranking of the credit events: first–to–default, second–to–default, etc. The second is characterized by a pay–out depending on the percentiles of the portfolio's loss distribution induced by the credit events. The latter is often embedded in securitizations of portfolios of bonds or loans, i.e. CDO. This paper proposes some basic insights in the pricing of these particularly complex credit derivatives. Whenever possible, we will try to find an analytical approximation to the exact pricing formula, if a closed form solution is not available. (J.E.L.: G13).

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