Disastrous Defaults

64 Pages Posted: 1 Jun 2018 Last revised: 15 Sep 2019

See all articles by Christian Gourieroux

Christian Gourieroux

University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Sarah Mouabbi

Banque de France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: September 12, 2019

Abstract

The default of certain entities can have disastrous effects on the economy. This paper présents a framework aimed at analyzing the asset pricing and macro implications of “systemic defaults”. This framework is flexible and tractable enough to simultaneously replicate the price fluctuations of various far-out-of-the-money (disaster-exposed) credit and equity derivatives. According to our estimation results, market data imply that the default of a systemic entity is expected to be followed by a 3% decrease in consumption. The recessionary influence of systemic defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums.

Keywords: Disaster Risk, Systemic Entities, Default Dependencies, Credit Derivatives, Equilibrium Model

JEL Classification: E43, E44, E47, G01, G12

Suggested Citation

Gourieroux, Christian and Monfort, Alain and Mouabbi, Sarah and Renne, Jean-Paul, Disastrous Defaults (September 12, 2019). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3188085 or http://dx.doi.org/10.2139/ssrn.3188085

Christian Gourieroux

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4349 (Phone)
416-978-6713 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Montreal, Quebec H3C 3J7
Canada

Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE) ( email )

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92245 Malakoff Cedex
France
33.4117.7666 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Sarah Mouabbi

Banque de France ( email )

Paris
France

Jean-Paul Renne (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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