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Default, Liquidity and Crises: An Econometric Framework

Alain Monfort () and Jean-Paul Renne

No 2010-46, Working Papers from Center for Research in Economics and Statistics

Abstract: In this paper, we present a general discrete-time affine frameworkaimed at jointly modeling yield curves associated with different debtors. Theunderlying fixed-income securities may differ in terms of credit quality and/orin terms of liquidity. The risk factors follow conditionally Gaussian processes,with drifts and variance-covariance matrices that are subject to regime shiftsdescribed by a Markov chain with (historical) non-homogenous transition probabilities.While flexible, the model remains tractable. In particular, bond pricesare given by quasi-explicit formulas. Various numerical examples are proposed,including a sector-contagion model and credit-rating modeling.

Pages: 39
Date: 2010
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Journal Article: Default, Liquidity, and Crises: an Econometric Framework (2013) Downloads
Working Paper: Default, liquidity and crises: an econometric framework (2011) Downloads
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