Disastrous Defaults

65 Pages Posted: 15 Sep 2020

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)

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Date Written: August 2020

Abstract

We define a disastrous default as the default of a systemic entity. Such an event is expected to have a negative effect on the economy and to be contagious. Bringing macroeconomic structure to a noarbitrage 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. We find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 3% 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.

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 (August 2020). Banque de France Working Paper No. 778, Available at SSRN: https://ssrn.com/abstract=3690887 or http://dx.doi.org/10.2139/ssrn.3690887

Christian Gourieroux

University of Toronto - Department of Economics ( email )

150 St. George Street
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Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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

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National Bureau of Economic Research (NBER)

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Alain Monfort

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

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Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Maastricht University

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

Sarah Mouabbi (Contact Author)

Banque de France ( email )

Paris
France

Jean-Paul Renne

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

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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