Compound auto-regressive processes and defaultable bond pricing

term structure
credit risk
book chapter
Book chapter in Developments in Macro-Finance Yield Curve Modelling

Alain Monfort, Jean-Paul Renne


September 1, 2016

The aim of the present chapter is to propose a general and tractable strategy to model the dynamics of the term structure of defaultable- bond yields. To achieve this, we rely on the properties of compound auto-regressive (Car) processes. The usefulness of these processes in the building of risk-free (non-defaultable) bond pricing models is now well documented (see Darolles, Gourieroux and Jasiak, 2006, Gourieroux and Monfort, 2007, Monfort and Pegoraro, 2007 or Le, Singleton and Da, 2011). On the contrary, the number of papers using Car processes in defaultable-bond pricing models is small.

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