A nonparametric urn-based approach to interacting failing systems with an application to credit risk modeling

DOI10.1142/S0219024910006170zbMATH Open1205.91164arXiv1010.3586OpenAlexW2962940735MaRDI QIDQ3067161FDOQ3067161

Authors: Pasquale Cirillo, Pietro Muliere, J. Hüsler 

Publication date: 20 January 2011

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: In this paper we propose a new nonparametric approach to interacting failing systems (FS), that is systems whose probability of failure is not negligible in a fixed time horizon, a typical example being firms and financial bonds. The main purpose when studying a FS is to calculate the probability of default and the distribution of the number of failures that may occur during the observation period. A model used to study a failing system is defined default model. In particular, we present a general recursive model constructed by the means of inter- acting urns. After introducing the theoretical model and its properties we show a first application to credit risk modeling, showing how to assess the idiosyncratic probability of default of an obligor and the joint probability of failure of a set of obligors in a portfolio of risks, that are divided into reliability classes.

Full work available at URL: https://arxiv.org/abs/1010.3586

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zbMATH Keywords

credit riskdefault riskurn modelfailing systemneutral to right processes

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Nonparametric inference (62G99) Credit risk (91G40) Actuarial science and mathematical finance (91G99)

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• REINFORCED URN PROCESSES FOR MODELING CREDIT DEFAULT DISTRIBUTIONS
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Cited In (7)

• Alarm systems and catastrophes from a diverse point of view
• Shock models for defaults: parametric and nonparametric approaches
• Predictive construction of priors in Bayesian nonparametrics
• Reinforced urn processes for credit risk models
• The statistical properties of the threshold model and the feedback leadership condition
• Hierarchical reinforced urn processes
• REINFORCED URN PROCESSES FOR MODELING CREDIT DEFAULT DISTRIBUTIONS

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