Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a "contagious" response of the market portfolio during the credit event. When...

Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit-event risk typically preclude the most plausible economic justification for such risk to be priced, namely, a contemporaneous drop in the market portfolio. When this "contagion" channel is...

We propose an equilibrium model for defaultable bonds that are subject to contagion risk. Contagion arises because agents with 'fragile beliefs' are uncertain about the underlying economic state and its probability. Estimation on sovereign European CDS data shows that agents require a...

We propose an equilibrium model for defaultable bonds that are subject to contagion risk. Contagion arises because agents with "fragile beliefs'' are uncertain about the underlying economic state and its probability. Estimation on sovereign European credit default swaps (CDS) data shows that...

We propose a tractable equilibrium model for pricing defaultable bonds that are subject to contagion risk. Contagion arises because agents with 'fragile beliefs' are uncertain about both the underlying state of the economy and the posterior probabilities associated with these states. As such,...