Effects of economic interactions on credit risk

DOI10.1088/0305-4470/39/10/001zbMATH Open1087.91029arXivphysics/0512155OpenAlexW2146038822MaRDI QIDQ3376774FDOQ3376774

Authors:

Publication date: 24 March 2006

Published in: Journal of Physics A: Mathematical and General (Search for Journal in Brave)

Abstract: We study a credit risk model which captures effects of economic interactions on a firm's default probability. Economic interactions are represented as a functionally defined graph, and the existence of both cooperative, and competitive, business relations is taken into account. We provide an analytic solution of the model in a limit where the number of business relations of each company is large, but the overall fraction of the economy with which a given company interacts may be small. While the effects of economic interactions are relatively weak in typical (most probable) scenarios, they are pronounced in situations of economic stress, and thus lead to a substantial fattening of the tails of loss distributions in large loan portfolios. This manifests itself in a pronounced enhancement of the Value at Risk computed for interacting economies in comparison with their non-interacting counterparts.

Full work available at URL: https://arxiv.org/abs/physics/0512155

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zbMATH Keywords

generating functioncredit riskdefault probability

Mathematics Subject Classification ID

Dynamical systems in optimization and economics (37N40) Economic growth models (91B62)

Cited In (6)

• Contagion in an interacting economy
• A minimal model for congestion phenomena on complex networks
• A network of business relations to model counterparty risk
• VOLATILITY EFFECTS ON THE ESCAPE TIME IN FINANCIAL MARKET MODELS
• ON THE WELFARE EFFECTS OF CREDIT ARRANGEMENTS
• Uncovering the non-equilibrium stationary properties in sparse Boolean networks

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