Default, Liquidity, and Crises: an Econometric Framework

This article presents 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...

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Bibliographic Details
Published in:Journal of financial econometrics 2013-04, Vol.11 (2), p.221-262
Main Authors: Monfort, A., Renne, J.-P.
Format: Article
Language:English
Subjects:
Default
Econometrics
Economic crisis
Liquidity
Markov analysis
Studies
Yield
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Summary:This article presents 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 covariance matrices that are subject to regime shifts described by a Markov chain with (historical) non-homogenous transition probabilities. Bond prices are given by quasi-explicit formulas. The tractability of the framework is illustrated by the estimation of a term-structure model of the spreads between U.S. BBB-rated corporate bonds and Treasuries. Alternative applications are proposed, including a sector-contagion model as well as the explicit modeling of credit-rating transitions. [PUBLICATION ABSTRACT]
ISSN:1479-8409
1479-8417
DOI:10.1093/jjfinec/nbs020