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

2020 ◽  
Author(s):  
Alain Monfort ◽  
Fulvio Pegoraro ◽  
Jean-Paul Renne ◽  
Guillaume Roussellet
Keyword(s):  
Credit Risk ◽  
Jump Condition ◽  
Risk Premiums ◽  
Contagion Effects ◽  
Credit Default ◽  
Joint Dynamics ◽  
Sovereign Credit Risk ◽  
Risk Pricing ◽  
Credit Risk Pricing ◽  
Credit Event

We propose a discrete-time affine 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, and (iii) the pricing of credit events. Our affine framework delivers explicit pricing formulas for default-sensitive securities such as bonds and credit default swaps (CDSs). We estimate a euro-area multicountry version of the model and address economic questions related to the pricing of sovereign credit risk. We find that both frailty (common factors) and contagion phenomena are important to account for the joint dynamics of credit spreads. Our results also provide evidence of credit-event pricing, which is at the source of substantial credit risk premiums, even for short maturities. Finally, we extract measures of depreciation-at-default from CDSs denominated in different currencies. This paper was accepted by Kay Giesecke, finance.

scholarly journals The impacts of financial crisis on sovereign credit risk analysis in Asia and Europe

2015 ◽  
Vol 02 (03) ◽  
pp. 1550026
Author(s):  
Min Zhang ◽  
Adam W. Kolkiewicz ◽  
Tony S. Wirjanto ◽  
Xindan Li
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Risk Premium ◽  
Global Financial Crisis ◽  
European Countries ◽  
Foreign Reserve ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
Credit Risk Analysis ◽  
Credit Event

In this paper, we investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2007–2008 global financial crisis. Our results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, our results also show that commonality is importantly associated with both local and global financial and economic variables. However, there are markedly different impacts of the sovereign of credit risk in Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre- and post-crisis periods. Then the resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components appear to weight more than risk-premiums.

The Relative Role of Sovereign CDS and Bond Markets in Efficiently Pricing Emerging Market Sovereign Credit Risk

2020 ◽  
Vol 19 (3) ◽  
pp. 296-325
Author(s):  
Zubair Ali Raja ◽  
William J. Procasky ◽  
Renee Oyotode-Adebile
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Emerging Market ◽  
Jel Classification ◽  
Bond Markets ◽  
Relative Role ◽  
Data Set ◽  
Sovereign Credit ◽  
Credit Default ◽  
Sovereign Credit Risk

Extant literature reports mixed findings on the relative efficiency of credit default swaps (CDS) and bond markets in pricing emerging market sovereign credit risk. Using a more comprehensive data set than analyzed earlier, we reexamine this issue and find that CDS dominate bonds in the price discovery of this risk, an advantage we attribute to the greater relative liquidity of that market. One exception is during the financial crisis, suggesting that when panic hits, sovereign markets price credit risk differently. However, even then, the CDS market has a greater impact on price discovery than the bond market, indicating greater overall efficiency. JEL Classification: G11, G12, G13, G14, G23

Sign in / Sign up

Export Citation Format

Share Document