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

Author

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  • 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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    2. 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.
    3. Dumitru, Ana-Maria & Holden, Thomas, 2019. "Quantifying the transmission of European sovereign default risk," EconStor Preprints 193632, ZBW - Leibniz Information Centre for Economics.
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    More about this item

    Keywords

    a ffine credit risk model; Gamma-zero distribution; no-jump condition; contagion; credit-eventrisk; sovereign credit risk and exchange rates.;
    All these keywords.

    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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