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A Generalized Endogenous Grid Method for Default Risk Models

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  • YOUNGSOO JANG
  • SOYOUNG LEE

Abstract

We extend the endogenous grid method to default risk models, which is faster and more accurate than grid search. Our method is 4 to 27 times faster and provides a more accurate bond price function, resulting in substantial differences in the predictions of the canonical sovereign debt model. When applied to Arellano's (2008) model, our approach predicts a standard deviation of the interest rate spread one‐third lower and defaults 3 to 5 times less frequently than does the conventional approach. Finally, we demonstrate that our method is applicable to a broad class of default risk models by characterizing sufficient conditions.

Suggested Citation

  • Youngsoo Jang & Soyoung Lee, 2026. "A Generalized Endogenous Grid Method for Default Risk Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 58(4), pages 1131-1166, June.
    • Handle: RePEc:wly:jmoncb:v:58:y:2026:i:4:p:1131-1166
    DOI: 10.1111/jmcb.13235
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