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Affine Modeling of Credit Risk, Pricing of Credit Events and Contagion

Alain Monfort (), Jean-Paul Renne and Guillaume Roussellet ()
Authors registered in the RePEc Author Service: Fulvio Pegoraro ()

No 2020-01, Working Papers from Center for Research in Economics and Statistics

Abstract: We propose a discrete-time affi ne pricing model that simultaneously allows for (i) the presence of systemic entities by departing from the no-jump condition on the factors'conditional distribution, (ii) contagion effects, (iii) and the pricing of credit events. Our a ffine framework delivers explicit pricing formulas for default-sensitive securities like bonds and credit default swaps (CDS). We estimate a multi-country version of the model and address economic questions related to the pricing of sovereign credit risk. Speci cally, using euro-area data, we explore the in fluence of allowing for the pricing of credit events, we compare frailty and contagion channels, and we extract measures of depreciation-at-default from CDS denominated indifferent currencies.

Keywords: a ffine credit risk model; Gamma-zero distribution; no-jump condition; contagion; credit-eventrisk; sovereign credit risk and exchange rates. (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2020-01-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
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