Modeling Credit Contagion Via the Updating of Fragile Beliefs -- Online Appendix

33 Pages Posted: 29 Jan 2015

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Jean Helwege

UC Riverside

Date Written: April 10, 2014

Abstract

We propose an equilibrium model for defaultable bonds that are subject to contagion risk. Contagion arises because agents with "fragile beliefs"' are uncertain about the underlying economic state and its probability. Estimation on sovereign European credit default swaps (CDS) data shows that agents require a time-varying risk premium for bearing state uncertainty. The model outperforms affine specifications with the same number of state variables, suggesting that there are important nonlinearities in credit spreads that are captured by our model. Contagion drives most of the variation in CDS spreads, especially before the crisis. However, economic fundamentals account for a significant fraction during the crisis. This Online Appendix contains additional results, proofs, and information that we omitted from the main paper.

The paper "Modeling Credit Contagion via the Updating of Fragile Beliefs" to which this Appendix applies is available at the following URL: http://ssrn.com/abstract=2016579

Keywords: Contagion, sovereign risk, CDS pricing, fragile beliefs, learning, affine models

JEL Classification: G12, G13

Suggested Citation

Benzoni, Luca and Collin-Dufresne, Pierre and Goldstein, Robert S. and Helwege, Jean, Modeling Credit Contagion Via the Updating of Fragile Beliefs -- Online Appendix (April 10, 2014). Available at SSRN: https://ssrn.com/abstract=2555693 or http://dx.doi.org/10.2139/ssrn.2555693

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
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CH-1015 Lausanne, CH-6900
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Swiss Finance Institute

c/o University of Geneva
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National Bureau of Economic Research (NBER)

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Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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Minneapolis, MN 55455
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612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jean Helwege

UC Riverside ( email )

900 University Ave.
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Riverside, CA 92521
United States
9518274284 (Phone)

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