Firm-Specific Credit Risk Estimation in the Presence of Regimes and Noisy Prices

17 Pages Posted: 3 May 2016 Last revised: 28 May 2017

See all articles by Jean-François Bégin

Jean-François Bégin

Simon Fraser University

Mathieu Boudreault

University of Quebec at Montreal (UQAM)

Geneviève Gauthier

HEC Montreal - Department of Decision Sciences; HEC Montreal - Department of Management Sciences

Date Written: June 15, 2016

Abstract

Security prices are important inputs for estimating credit risk. Yet, to obtain an accurate firm-specific credit risk assessment, one needs a reliable model and a methodology that filters the elements unrelated to the firm’s fundamentals from market prices.

In this article, we introduce a hybrid credit risk model defined in a Markov-switching environment. It captures firm-specific changes in the leverage uncertainty during crises. We also propose a new efficient method to estimate the model, and a numerical scheme based on trinomial lattices to price credit derivatives. The estimation is finally performed on more than 200 firms using maximum likelihood estimation.

Keywords: Credit risk, maximum likelihood estimation, regime-switching, filtering, noisy prices

JEL Classification: C51, C58, G01

Suggested Citation

Bégin, Jean-François and Boudreault, Mathieu and Gauthier, Genevieve, Firm-Specific Credit Risk Estimation in the Presence of Regimes and Noisy Prices (June 15, 2016). Available at SSRN: https://ssrn.com/abstract=2772370 or http://dx.doi.org/10.2139/ssrn.2772370

Jean-François Bégin (Contact Author)

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.sfu.ca/~jbegin

Mathieu Boudreault

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

Genevieve Gauthier

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada

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