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We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be…
The modeling of the probability of joint default or total number of defaults among the firms is one of the crucial problems to mitigate the credit risk since the default correlations significantly affect the portfolio loss distribution and…
Interbank contagion can theoretically exacerbate losses in a financial system and lead to additional cascade defaults during downturn. In this paper we produce default analysis using both regression and neural network models to verify…
The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. We model the market as a random directed network, where the vertices represent financial institutions and the weighted edges…
We study the impact of contagion in a network of firms facing credit risk. We describe an intensity based model where the homogeneity assumption is broken by introducing a random environment that makes it possible to take into account the…
It had been believed in the conventional practice that the risk of a bank going bankrupt is lessened in a straightforward manner by transferring the risk of loan defaults. But the failure of American International Group in 2008 posed a more…
We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the…
This paper studies the optimal dividend for a multi-line insurance group, in which each subsidiary runs a product line and is exposed to some external credit risk. The default contagion is considered such that one default event may increase…
The present paper provides a multi-period contagion model in the credit risk field. Our model is an extension of Davis and Lo's infectious default model. We consider an economy of n firms which may default directly or may be infected by…
The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are…
We consider a general tractable model for default contagion and systemic risk in a heterogeneous financial network, subject to an exogenous macroeconomic shock. We show that, under some regularity assumptions, the default cascade model…
We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a…
We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network…
We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system.…
As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and…
We consider a dynamic model of interconnected banks. New banks can emerge, and existing banks can default, creating a birth-and-death setup. Microscopically, banks evolve as independent geometric Brownian motions. Systemic effects are…
Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in…
We propose a novel credit default model that takes into account the impact of macroeconomic information and contagion effect on the defaults of obligors. We use a set-valued Markov chain to model the default process, which is the set of all…
As impressively shown by the financial crisis in 2007/08, contagion effects in financial networks harbor a great threat for the stability of the entire system. Without sufficient capital requirements for banks and other financial…
The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly…