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Default, liquidity and crises: an econometric framework

  • Monfort, A.
  • Renne, J-P.

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

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_340_2011.pdf
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Paper provided by Banque de France in its series Working papers with number 340.

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Length: 44 pages
Date of creation: 2011
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Handle: RePEc:bfr:banfra:340
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