Interactions between Market and Credit Risk: Modeling the Joint Dynamics of Default-free and Defaultable Bond Term Structures

Walder, Roger

doi:10.2139/ssrn.354480

Abstract

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Interactions between Market and Credit Risk: Modeling the Joint Dynamics of Default-free and Defaultable Bond Term Structures

Roger Walder

University of Lausanne (HEC), International Center FAME and Banque Cantonale Vaudoise, Switzerland

November 2002

FAME Research Paper No. 56

Abstract:
The objective of this paper is to model and estimate simultaneously the joint dynamics of default-free and defaultable bond term structures. Defaultable bond prices are modeled in an intensity based framework along the lines of Duffie and Singleton (1999) with state variables following an affine diffusion. Our special interest lies in the benefits of introducing various kinds of interdependencies in the drifts and the diffusions of the factors driving the term structure dynamics. We obtain consistent and efficient estimates of the model parameters using the efficient method of moments (EMM) of Gallant and Tauchen (1996).

Number of Pages in PDF File: 53

Keywords: Term Structure Model, Credit Risk, Defaultable Bond, Efficient Method of Moments

JEL Classification: C5, G13

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Date posted: December 16, 2002

Suggested Citation

Walder, Roger, Interactions between Market and Credit Risk: Modeling the Joint Dynamics of Default-free and Defaultable Bond Term Structures (November 2002). FAME Research Paper No. 56. Available at SSRN: http://ssrn.com/abstract=354480 or http://dx.doi.org/10.2139/ssrn.354480

Contact Information

Roger Walder (Contact Author)

University of Lausanne (HEC), International Center FAME and Banque Cantonale Vaudoise, Switzerland ( email )

Ch. de Sus-Craux 10B
CH-1166 Perroy
Switzerland