Default, liquidity, and crises: an econometric framework

A.M.E. Monfort, J.-P. Renne

Research output: Contribution to journalArticleAcademicpeer-review

6 Citations (Scopus)

Abstract

This article presents a general discrete-time affine framework aimed at jointly modeling yield curves associated with different debtors. The underlying fixed-income securities may differ in terms of credit quality and/or in terms of liquidity. The risk factors follow conditionally Gaussian processes, with drifts and covariance matrices that are subject to regime shifts described by a Markov chain with (historical) non-homogenous transition probabilities. Bond prices are given by quasi-explicit formulas. The tractability of the framework is illustrated by the estimation of a term-structure model of the spreads between U.S. BBB-rated corporate bonds and Treasuries. Alternative applications are proposed, including a sector-contagion model as well as the explicit modeling of credit-rating transitions.
Original languageEnglish
Pages (from-to)221-262
JournalJournal of Financial Econometrics
Volume11
Issue number2
DOIs
Publication statusPublished - 1 Jan 2013

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