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Credit Risk, Liquidity, and Bubbles

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  • Robert Jarrow
  • Philip Protter

Abstract

This paper presents an arbitrage‐free valuation model for a credit risky security where credit risk coexists and interacts with an asset price bubble and liquidity risk (or liquidity costs). As an illustration, this model is applied to determine the fair rate for microfinance loans.

Suggested Citation

  • Robert Jarrow & Philip Protter, 2020. "Credit Risk, Liquidity, and Bubbles," International Review of Finance, International Review of Finance Ltd., vol. 20(3), pages 737-746, September.
    • Handle: RePEc:bla:irvfin:v:20:y:2020:i:3:p:737-746
    DOI: 10.1111/irfi.12239
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    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
    2. Leif Andersen & Vladimir Piterbarg, 2007. "Moment explosions in stochastic volatility models," Finance and Stochastics, Springer, vol. 11(1), pages 29-50, January.
    3. Li, Xue-Mei, 2017. "Strict local martingales: Examples," Statistics & Probability Letters, Elsevier, vol. 129(C), pages 65-68.
    4. Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183, World Scientific Publishing Co. Pte. Ltd..
    5. Xin Guo & Robert A. Jarrow & Yan Zeng, 2009. "Credit Risk Models with Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 34(2), pages 320-332, May.
    6. Carole Bernard & Zhenyu Cui & Don McLeish, 2017. "On The Martingale Property In Stochastic Volatility Models Based On Time-Homogeneous Diffusions," Mathematical Finance, Wiley Blackwell, vol. 27(1), pages 194-223, January.
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    Citations

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    Cited by:

    1. Marta Gómez-Puig & Mary Pieterse-Bloem & Simón Sosvilla-Rivero, 2022. ""Dynamic connectedness between credit and liquidity risks in EMU sovereign debt markets"," IREA Working Papers 202217, University of Barcelona, Research Institute of Applied Economics, revised Oct 2022.
    2. Gómez-Puig, Marta & Pieterse-Bloem, Mary & Sosvilla-Rivero, Simón, 2023. "Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets," Journal of Multinational Financial Management, Elsevier, vol. 68(C).
    3. Brett, Craig & Sarkar, Saikat, 2022. "Financial bubbles and income inequality," MPRA Paper 112070, University Library of Munich, Germany.

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