Affine Modelling of Credit Risk, Credit Event and Contagion
Event details
| Date | 08.11.2016 |
| Hour | 12:00 › 13:00 |
| Speaker | Fulvio PEGORARO (Banque de France) |
| Location | |
| Category | Conferences - Seminars |
This paper proposes a general positive affine credit-risk pricing model for defaultable securities in a discrete-time framework. Building on the recently introduced non-negative Gamma-zero distribution entailing a point mass at zero, our model jointly allows for (i) the presence of systemic entities by breaking down the no-jump condition on the factors' conditional distribution, (ii) contagion effects between defaultable entities, (iii) the pricing of credit events and (iv) the presence of stochastic recovery rates. The main advantage of our framework is its ability to relax simultaneously several restrictive assumptions made in the existing models while staying in the affine class, thus delivering explicit pricing formulas for default-sensitive securities like bonds and credit default swaps. A first application shows how this framework can be exploited to estimate sovereign credit risk premiums in a parsimonious endowment-economy model. In a second application, we jointly model term structures of CDS denominated in different currencies and extract market-implied probabilities of depreciations at default. A third application illustrates the ability of the model to replicate the behavior of banks’ CDS spreads that was observed in the aftermaths of the Lehman Brothers' bankruptcy.
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