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Default, Liquidity and Crises : An Econometric Framework

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  • Alain Monfort

    (Crest)

  • Jean-Paul Renne

    (Crest)

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.

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Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-46.

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Length: 39
Date of creation: 2010
Date of revision:
Handle: RePEc:crs:wpaper:2010-46

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Cited by:
  1. Thomas Laubach, 2010. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 7-29 National Bureau of Economic Research, Inc.
  2. Monfort, A. & Renne, J-P., 2011. "Credit and liquidity risks in euro area sovereign yield curves," Working papers 352, Banque de France.

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