Intensity of default in sovereign bonds: Estimation of an unobservable process

Karina V. Otero

MPRA Paper from University Library of Munich, Germany

Abstract: This paper proposes a new approach to estimate general stationary diffusion processes that describe the evolution of unobserved arrival rates of credit events on sovereign bonds, allowing for arbitrary parametric drift and diffusion specifications. The solutions and transition processes for stationary diffusions are generally unknown in closed form and therefore standard maximum likelihood methods do not apply. Moreover, the arrival rates of credit events on sovereign bonds are unobservable and a direct nonparametric estimation does not work. This paper overcomes these challenges combining a semi-nonparametric estimator in the framework of the Efficient Method of Moments, Gallant and Tauchen (1996), and a reduced-form model for pricing sovereign bonds and credit default swaps. The application for Brazil sovereign assets explores the performance of the model under different specifications of the intensity process.

Keywords: Efficient Method of Moments (EMM); semi-nonparametric (SNP) econometrics; Hermite; latent variables; estimation of stochastic differential equations; estimation of diffusions; asset pricing; numerical methods for partial differential equations; credit risk; cox process; credit derivatives; credit default swaps (CDS). (search for similar items in EconPapers)
JEL-codes: C14 C32 C58 C63 G12 G13 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/86782/1/MPRA_paper_86782.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:86782

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().