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

DOI10.1142/S0219024910006170MaRDI QIDQ3067161zbMATH OpenOpenAlexFDO

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)

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

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)

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.

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Cited in

(7)

• REINFORCED URN PROCESSES FOR MODELING CREDIT DEFAULT DISTRIBUTIONS
• 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

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