Default, Liquidity and Crises : An Econometric Framework

In this paper, we present a general discrete-time affine frameworkaimed at jointly modeling yield curves associated with different debtors. Theunderlying fixed-income securities may differ in terms of credit quality and/orin terms of liquidity. The risk factors follow conditionally Gaussian processes,with drifts and variance-covariance matrices that are subject to regime shiftsdescribed by a Markov chain with (historical) non-homogenous transition probabilities.While flexible, the model remains tractable. In particular, bond pricesare given by quasi-explicit formulas. Various numerical examples are proposed,including a sector-contagion model and credit-rating modeling.