Credit Spreads Between German and Italian Sovereign Bonds - Do One-Factor Affine Models Work?

Duellmann, Klaus; Windfuhr, Marc

doi:10.2139/ssrn.246823

Cited by 7 publications

(2 citation statements)

References 15 publications

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“…Taurén (1999) utilized GMM to estimate the spread dynamics as a Chan et al (1992) process. Dülmann and Windfuhr (2000) and Geyer et al (2001) implemented an ML procedure with Kalman filtering to obtain parameter estimates of Vasicek and/or CIR models for the instantaneous spread. Duffie et al (2003) used an approximate Maximum Likelihood method to estimate a multi-factor model with Vasicek and CIR processes.…”

Section: Literaturementioning

confidence: 99%

Pricing default swaps: Empirical evidence

Houweling¹,

Vorst

2005

Journal of International Money and Finance

241

107

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In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model outperforms directly comparing bonds' credit spreads to default swap premiums. We find that the model yields unbiased premium estimates for default swaps on investment grade issuers, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is relatively insensitive to the value of the assumed recovery rate.

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Section: Literaturementioning

confidence: 99%

Pricing default swaps: Empirical evidence

Houweling¹,

Vorst

2005

Journal of International Money and Finance

241

107

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“…In the case of the euro area, market liquidity, cyclical conditions and risk appetite, which are related to the level of short-term rates, have been identi…ed as important factors behind the level of bond spreads (Manganelli and Wolswijk (2009) A second strand of the literature includes papers that estimate multi-issuer, no-arbitrage, a¢ ne term structure models. For example, in order to analyze the dynamics of bond spreads of EMU countries, Düllmann and Windfuhr (2000) employ standard interest rate models using the short rate and the spread between risky and risk-free bonds as factors, while Geyer et al (2004) rely on the estimation of purely latent factor models. Borgy et al (2011), on the other hand, employ a multi-country a¢ ne term structure model making use of macroeconomic variables as factors.…”

Section: Introductionmentioning

confidence: 99%

A Macro-Financial Analysis of the Euro Area Sovereign Bond Market

et al. 2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Statement of purpose:The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. Orders AbstractWe estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011)

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Controlling the risk: a case study of the Indian liquidity crisis 1990–92

Clark

Lakshmi

2003

J of Intl Development

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Over the period 1990-92, India experienced a foreign exchange crisis complicated by political turmoil that led to three rapid downgrades of its credit rating within the short space of a year. However, India did not default or reschedule its debt and with the help of foreign exchange loans after 44 years of socialism, proceeded with a structural, market-oriented reform of the economy. This crisis differs from the subsequent crises in Mexico, Asia and Russia that followed later in the 1990s in that it did not spread to other countries. The reaction of the international markets was mild. Net flows of private foreign capital remained positive over the crisis period and the three rating migrations increased the country's cost of borrowing by only 1 per cent. The reaction of domestic markets was also positive and by the end of 1991 the local stock market had started an impressive bull run. Thus, the case of India 1990-92 is an interesting study in macroeconomic crisis management with lessons for the future. The crisis was short, damage to investor confidence was minimal, and a turnaround was achieved within three years. This study attempts to examine the crisis, its handling and reaction of the market to downgradings. Copyright © 2003 John Wiley & Sons, Ltd.

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Credit Spreads Between German and Italian Sovereign Bonds - Do One-Factor Affine Models Work?

Cited by 7 publications

References 15 publications

Pricing default swaps: Empirical evidence

Pricing default swaps: Empirical evidence

A Macro-Financial Analysis of the Euro Area Sovereign Bond Market

Controlling the risk: a case study of the Indian liquidity crisis 1990–92

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