About

Douglas T. Breeden is the William W. Priest Professor of Finance and a former Dean of Duke University’s Fuqua School of Business. He has previously served on faculties at Chicago Booth, Stanford, and as a distinguished professor at North Carolina. Breeden was the Fischer Black Visiting Professor of Financial Economics at MIT’s Sloan School from 2011 to 2013, where he received an “Outstanding Teacher” award. His research has made seminal contributions to the understanding of insurance prices implicit in option prices, the Consumption CAPM, the term structure of interest rates, and option-adjusted spreads on mortgage securities. He has collaborated with Robert Litzenberger on influential research regarding central bank policy impacts on the distribution of insurance prices for future interest rates, which won a Roger Murray Prize from the Q-Group. Breeden has presented his research at central bank meetings across the Americas, Europe, Asia, the Middle East, and on CNBC TV. His latest publication is scheduled for the Fall 2024 issue of the Journal of Investment Management. Breeden has held editorial roles at top finance journals, including being a founding editor of the Journal of Fixed Income for ten years, and has served on the Board of Directors of the American Finance Association, where he was elected a lifetime Fellow in 2010. He has also served on the Board of the Financial Management Association. Recognized as “Financial Engineer of the Year 2013” by the International Association for Quantitative Finance, Breeden holds a Ph.D. in Finance from Stanford and an S.B. from MIT. He has been actively involved in philanthropy, providing naming grants for various facilities including Breeden Hall and the Breeden Professorship at Duke’s Fuqua School of Business, as well as educational and community institutions. His contributions to academia, business, and community development have been honored through a conference in his name at Duke/Fuqua, featuring tributes from Nobel Laureates and prominent finance scholars.

Research topics

• Economics
• Finance
• Monetary economics
• Macroeconomics

Selected publications

• Central Bank Policy Impacts on the Distribution of State Prices for Future Interest Rates, 2003–2022

  The Journal of Fixed Income · 2022 · 2 citations

  1st authorCorresponding
  • Economics
  • Monetary economics
  • Macroeconomics

  In this article, we extend the 1978 Breeden–Litzenberger method of extracting state prices from option prices, showing how portfolios of butterfly spreads can be combined with right and left tail spreads to nonparametrically extract discrete state prices from option prices. We derive how those state prices should be biased estimates of true, objective probabilities. For interest rate options, we show that the biases can vary predictably over time (sometimes too high, sometimes too low), as the correlation of interest rates with consumption and wealth has changed signs over time. Consumption betas and proper risk premiums on bonds and of their state prices are at times predictably positive and at times predictably negative. We apply our technique to provide a brief 20-year history of central bank intervention impacts in the US, UK, and Eurozone from 2003 to 2022. Movements in state prices are quite large in the Financial Panic of 2008–2009, as well as in the European Sovereign Debt Crisis of 2010–2013, with Brexit and the Trump elections in 2016, and with the coronavirus pandemic in 2020–2021. Tapering in 2013 and 2022 and liftoffs in rates in 2015 and 2022 were shown to strongly shift state price distributions back toward the symmetry of 2003–2007. We show that central banks dramatically impacted entire state price distributions, not just levels of rates.

  PublisherDOI

• Intertemporal Portfolio Theory and Asset Pricing

  The New Palgrave Dictionary of Economics · 2018-01-01

  book-chapter1st authorCorresponding

  The intent of this entry is to present intertemporal portfolio theory and asset pricing models, to explain their results and to illustrate the differences between multiperiod and single-period models. To appreciate intertemporal portfolio theory and asset pricing, it is necessary to understand the state of finance theory prior to the seminal intertemporal works of Merton (1969, 1971, 1973), Samuelson (1969), Fama (1970), Hakansson (1970) and Rubinstein (1974). Section "Single-Period Portfolio Theory and Asset Pricing" presents single-period theory and some general results on portfolio statistics. Section "Intertemporal Portfolio Theory" presents intertemporal portfolio theory. Section "Intertemporal Capital Asset Pricing Model (ICAPM)" presents the intertemporal asset pricing model, and Section "Consumption-Oriented Asset Pricing Model (CCAPM)" presents the consumption-oriented representation of it. Section "Extensions and Conclusions" gives important extensions (without proof) and concludes the entry.

  PublisherDOI

• Consumer signals

  Journal of Asset Management · 2016-05-05

  article1st authorCorresponding
  PublisherDOI

• Convexity and Empirical Option Costs of Fixed Rate Mortgages

  2015-08-11

  article1st authorCorresponding

  This article computes empirical option costs for fixed rate mortgages and compares them to brokers' forecasts. Estimates of risks for mortgage derivatives such as IOs are also examined and shown to have very substantial errors and very substantial differences in the forecasts by different brokers.

• Consumption-Based Asset Pricing, Part 2: Habit Formation, Conditional Risks, Long-Run Risks, and Rare Disasters

  Annual Review of Financial Economics · 2015-12-07 · 8 citations

  article1st authorCorresponding

  Following Part 1 of this article, which reviews late-1970s to 1990s classic derivations and tests of the consumption capital asset pricing model, here in Part 2 we review more recent developments, some of which are based on utility functions with non-time-separable preferences. Important second-generation consumption-based asset pricing advances are also reviewed, including models with habit formation and long-run risk. These models give large cyclical changes in relative risk aversion and risk premiums as well as lagged impacts of aggregate consumption changes on risk premiums. We review asset pricing with rare disasters and models focused on consumer spending on durables and real estate, as well as the fraction of spending financed by labor income. The second-generation models discussed have more free parameters and fit the empirical data better than did the first-generation consumption-based asset pricing models.

  PublisherDOI

• Consumption-Based Asset Pricing, Part 1: Classic Theory and Tests, Measurement Issues, and Limited Participation

  Annual Review of Financial Economics · 2015-12-07 · 20 citations

  article1st authorCorresponding

  This article, Part 1 of 2, reviews the classical origins, development, and tests of consumption-based asset pricing theory, focusing mainly on the first two decades from 1976 to 1998. Starting with the original consumption capital asset pricing model (CCAPM) derivations, we review both theory and subsequent tests and provide some new applications. The consumption aggregation theorem and CCAPM are derived, and optimal consumption and portfolio strategies are discussed. The term structure of interest rates is derived from the term structures for expected growth, volatility, and inflation. Time aggregation biases in consumption betas as well as the usefulness of the “consumption-mimicking portfolio” are also derived. In addition to various empirical tests, models and tests of limited participation in asset markets as well as models of incomplete markets are presented. When certain measurement issues are taken into account, the CCAPM performs better than the original CAPM and nearly as well as the Fama-French three-factor model.

  PublisherDOI

• Bank Risk Management

  2015-08-11 · 4 citations

  article1st authorCorresponding

• Why Do Firms Hedge? <i>An Asymmetric Information Model</i>

  The Journal of Fixed Income · 2015-12-31 · 88 citations

  article1st authorCorresponding

  We present an asymmetric information model of hedging that has the insight that hedging is undertaken by managers with higher ability who wish to lock-in the greater profits that result from that ability, thereby allowing the market to learn this higher ability more quickly. Thus, hedging is an attempt to improve the informativeness of the learning process by the higher ability manager. We analyze two models: First, a model in which managers care only about their reputations. In this case, we show that an intuitive equilibrium involving hedging by higher ability managers always exists. Lower ability managers also hedge when differences in abilities are low but do not hedge when differences in abilities are high. We then consider a second model in which managers hold equity in the firm in addition to caring for their managerial reputations. The presence of FDIC insurance or pre-existing debt makes hedging costly to equity holders as it is a variance-reducing activity. However, the cost of hedging is lower for higher ability managers. This leads to both types of managers not hedging when difference in ability is low. At higher differences in ability, the intuitive equilibrium in which the higher ability manager hedges exists. In this equilibrium, greater separation occurs relative to the case in which managers were only concerned about their reputations. <b>TOPICS:</b>Derivatives applications, options

  PublisherDOI

• Futures Markets and Commodity Options: Hedging and Optimality in Incomplete Markets

  RePEc: Research Papers in Economics · 2015-08-11 · 3 citations

  article1st authorCorresponding

  This paper examines the allocational roles of futures markets and commodity options in multi-good and multi-period economies. In a continuous-time model with time-additive utilities and homogeneous beliefs, trading in unconditional futures contracts, the market portfolio and a riskless asset gives any Pareto-optimal allocation. Individuals' optimal holdings of futures contracts in the continuous-time model are related to their consumption bundles and to their risk tolerances. It is shown that both and reverse hedging behavior are possible. In the general model with discrete trading, options on portfolios of commodity options are shown to permit any unconstrained Pareto-optimal allocation.

  Publisher

• Consumption, Production, Inflation and Interest Rates: A Synthesis

  RePEc: Research Papers in Economics · 2015-08-11 · 9 citations

  article1st authorCorresponding

  This paper uses discrete-time and continuous-time models to derive equilibrium relations among real and nominal interest rates and the expected growth, variance and covariance parameters of optimally chosen paths for aggregate real consumption and aggregate production. Simple, intuitive and fairly general relations are obtained, which apply to most of the models of financial economics of the past 20 years. The single-good analysis generalizes and provides a synthesis of many prior works, whereas the multi-good analysis provides more original results. Consistent business cycle movements are examined for interest rates, inflation and consumption and production aggregates.

  Publisher

Frequent coauthors

• Robert H. Litzenberger

  11 shared

• Eduardo S. Schwartz

  Simon Fraser University

  3 shared

• Edward Rice

  3 shared

• Beda Herbison

  Arizona State University

  2 shared

• Siva Viswanathan

  University of Maryland, College Park

  2 shared

• Alfred Page

  Arizona State University

  2 shared

• Michael R. Gibbons

  2 shared

• Tingyan Jia

  Stanford University

  2 shared

Awards & honors

• Outstanding Teacher award at MIT Sloan (2011-2013)
• Roger Murray Prize from the Q-Group
• Financial Engineer of the Year 2013 by the International Ass…
• Lifetime Fellow of the American Finance Association (2010)