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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.

Suggested Citation

  • Alain Monfort & Jean-Paul Renne, 2010. "Default, Liquidity and Crises : An Econometric Framework," Working Papers 2010-46, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2010-46
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    Citations

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    Cited by:

    1. Thomas Laubach, 2011. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 7-30.
    2. Gouriéroux, C. & Monfort, A. & Renne, J.P., 2014. "Pricing default events: Surprise, exogeneity and contagion," Journal of Econometrics, Elsevier, vol. 182(2), pages 397-411.
    3. Juan Ángel García & Ricardo Gimeno, 2014. "Flight-to-liquidity flows in the euro area sovereign debt crisis," Working Papers 1429, Banco de España;Working Papers Homepage.
    4. Alain Monfort & Jean-Paul Renne, 2011. "Credit and Liquidity Risks in Euro-area Sovereign Yield Curves," Working Papers 2011-26, Center for Research in Economics and Statistics.
    5. Schuster, Philipp & Uhrig-Homburg, Marliese, 2015. "Limits to arbitrage and the term structure of bond illiquidity premiums," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 143-159.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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