Document de travail

Disastrous Defaults

Christian Gouriéroux, Alain Monfort, Sarah Mouabbi et Jean-Paul Renne

Résumé

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.

Codes JEL

  • E43: Interest Rates: Determination, Term Structure, and Effects
  • E44: Financial Markets and the Macroeconomy
  • E47: Forecasting and Simulation: Models and Applications
  • G01: Financial Crises
  • G12: Asset Pricing • Trading Volume • Bond Interest Rates

Référence

Christian Gouriéroux, Alain Monfort, Sarah Mouabbi et Jean-Paul Renne, « Disastrous Defaults », TSE Working Paper, n° 21-1237, juillet 2021.

Voir aussi

Publié dans

TSE Working Paper, n° 21-1237, juillet 2021