Gourieroux, Christian, Monfort, Alain, Mouabbi, Sarah and Renne, Jean-Paul (2021) Disastrous Defaults. TSE Working Paper, n. 21-1237, Toulouse, France

[thumbnail of wp_tse_1237.pdf]
Download (10MB) | Preview


We define a disastrous default as the default of a systemic entity, which has a negative effect on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage asset pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. Using European data, we find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 2% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption.

Item Type: Monograph (Working Paper)
Language: English
Date: July 2021
Place of Publication: Toulouse, France
JEL Classification: E43 - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Financial Markets and the Macroeconomy
E47 - Forecasting and Simulation
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 01 Sep 2021 08:55
Last Modified: 01 Sep 2021 08:55
OAI Identifier: oai:tse-fr.eu:125843
URI: https://publications.ut-capitole.fr/id/eprint/43715
View Item


Downloads per month over past year