Pontificia Universidad Católica de Chile Pontificia Universidad Católica de Chile
Cortázar G., Schwartz E. and Tapia C. (2012)

Credit spreads in illiquid markets: Model and implementation.

Revista : Emerging Markets Finance and Trade
Volumen : 48
Número : 6
Páginas : 53–72
Tipo de publicación : ISI


This paper presents a methodology for estimating a family of credit spread term structures in a market with few transactions. The authors propose partitioning the market into risk classes and modeling credit spread term structures for each risk class usinga multifactor Vasicek model with some common and some risk class-specific factors.The approach uses information on the cross section and time series of corporate bonds in all the risk classes to estimate the term structure of credit spreads in each risk class. The model is jointly estimated using an extended Kalman filter and implemented using Chilean corporate and government bonds.