Default, Liquidity, and Crises: an Econometric Framework
Alain Monfort () and
Journal of Financial Econometrics, 2013, vol. 11, issue 2, 221-262
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. Copyright The Author, 2012. Published by Oxford University Press. All rights reserved. For Permissions, please email: firstname.lastname@example.org, Oxford University Press.
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Working Paper: Default, liquidity and crises: an econometric framework (2011)
Working Paper: Default, Liquidity and Crises: An Econometric Framework (2010)
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