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Affine Modeling of Credit Risk, Pricing of Credit Events and Contagion

Author

Listed:
  • Alain MONFORT

    (CREST)

  • Jean-Paul RENNE

    (University of Lausanne, HEC)

  • Guillaume ROUSSELLET

    (Desautels Faculty of Management, McGill University)

Abstract

We propose a discrete-time affi ne pricing model that simultaneously allows for (i) the presence of systemic entities by departing from the no-jump condition on the factors'conditional distribution, (ii) contagion effects, (iii) and the pricing of credit events. Our a ffine framework delivers explicit pricing formulas for default-sensitive securities like bonds and credit default swaps (CDS). We estimate a multi-country version of the model and address economic questions related to the pricing of sovereign credit risk. Speci cally, using euro-area data, we explore the in fluence of allowing for the pricing of credit events, we compare frailty and contagion channels, and we extract measures of depreciation-at-default from CDS denominated indifferent currencies.

Suggested Citation

  • Alain MONFORT & Jean-Paul RENNE & Guillaume ROUSSELLET, 2020. "Affine Modeling of Credit Risk, Pricing of Credit Events and Contagion," Working Papers 2020-01, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2020-01
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    Cited by:

    1. Augustyniak, Maciej & Badescu, Alexandru & Bégin, Jean-François & Jayaraman, Sarath Kumar, 2025. "A general option pricing framework for affine fractionally integrated models," Journal of Banking & Finance, Elsevier, vol. 171(C).
    2. Li, Quan & Zha, Yong & Dong, Yu, 2023. "Subsidize or Not: The Competition of Credit Card and Online Credit in Platform-based Supply Chain System," European Journal of Operational Research, Elsevier, vol. 305(2), pages 644-658.
    3. Roussellet, Guillaume, 2025. "The term structure of macroeconomic risks at the effective lower bound," Journal of Econometrics, Elsevier, vol. 248(C).
    4. Corradin, Stefano & Grimm, Niklas & Schwaab, Bernd, 2021. "Euro area sovereign bond risk premia during the Covid-19 pandemic," Working Paper Series 2561, European Central Bank.
    5. Fu, Michael C. & Li, Bingqing & Li, Fei & Wu, Rongwen, 2025. "Contagion network, portfolio credit risk, and financial crisis," European Journal of Operational Research, Elsevier, vol. 321(3), pages 942-957.
    6. Liu, Haibo & Tang, Qihe, 2025. "Modeling and pricing credit risk with a focus on recovery risk," Journal of Banking & Finance, Elsevier, vol. 170(C).
    7. Dumitru, Ana-Maria & Holden, Thomas, 2019. "Quantifying the transmission of European sovereign default risk," EconStor Preprints 193632, ZBW - Leibniz Information Centre for Economics.
    8. Qin, Zhaohui & Wang, Xiaowan & Chen, Yijie & Fan, Yali & Andrianarimanana, Mihasina Harinaivo & Gai, Dhornor Tarir Duok, 2024. "Time-varying default risk of Chinese-listed companies: From empirical test to theoretical conjecture," Finance Research Letters, Elsevier, vol. 67(PA).
    9. Masaru Tsuruta, 2024. "Interaction between Sovereign Quanto Credit Default Swap Spreads and Currency Options," JRFM, MDPI, vol. 17(2), pages 1-33, February.
    10. Augustyniak, Maciej & Badescu, Alexandru & Bégin, Jean-François, 2023. "A discrete-time hedging framework with multiple factors and fat tails: On what matters," Journal of Econometrics, Elsevier, vol. 232(2), pages 416-444.

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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