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Credit Spreads in Illiquid Markets: Model and Implementation

Author

Listed:
  • Gonzalo Cortazar
  • Eduardo S. Schwartz
  • Claudio Tapia

Abstract

This paper presents a methodology for estimating a family of credit spread term structures in a market with few transactions. The authors propose partitioning the market into risk classes and modeling credit spread term structures for each risk class using a multifactor Vasicek model with some common and some risk class-specific factors. The approach uses information on the cross section and time series of corporate bonds in all the risk classes to estimate the term structure of credit spreads in each risk class. The model is jointly estimated using an extended Kalman filter and implemented using Chilean corporate and government bonds.

Suggested Citation

  • Gonzalo Cortazar & Eduardo S. Schwartz & Claudio Tapia, 2012. "Credit Spreads in Illiquid Markets: Model and Implementation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(6), pages 53-72, November.
    • Handle: RePEc:mes:emfitr:v:48:y:2012:i:6:p:53-72
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    Citations

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    Cited by:

    1. Gonzalo Cortazar & Simon Gutierrez & Hector Ortega, 2016. "Empirical Performance of Commodity Pricing Models: When is it Worthwhile to Use a Stochastic Volatility Specification?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 457-487, May.
    2. Cortazar, Gonzalo & Beuermann, Diether & Bernales, Alejandro, 2013. "Risk Management with Thinly Traded Securities: Methodology and Implementation," IDB Publications (Working Papers) 4647, Inter-American Development Bank.

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