Contagion model on counterparty credit risk in the CRT market by considering the heterogeneity of counterparties and preferential-random mixing attachment

Tingqiang Chen, Jiepeng Wang, Haifei Liu and Yuanping He

Physica A: Statistical Mechanics and its Applications, 2019, vol. 520, issue C, 458-480

Abstract: This article constructs a SIRS model on counterparty credit risk contagion in the CRT market by considering the characteristics of preferential-random mixing attachment and heterogeneity of counterparties. It theoretically analyzes the effects, mechanisms, and evolution characteristics of the structure of counterparty credit network and its heterogeneity, counterparty behavior preference, fitness of counterparties, and regulatory rescue strategy on counterparty credit risk contagion in the CRT market. With the help of computer numerical simulation, the evolution of counterparty credit risk contagion in the CRT market are intuitively analyzed and depicted. The following main conclusions are obtained: (1) Counterparty credit risk contagion threshold in the CRT market is a monotone decreasing convex function on the counterparty risk preference and counterparty fitness and a monotone increasing convex function on the supervision and rescue probability (2) Counterparty credit risk contagion scale in the CRT market is a monotone decreasing concave function on the counterparty risk preference and counterparty fitness, a monotone decreasing convex function on the supervision and rescue probability, and a monotone increasing concave function on the counterparty degree. (3)The greater the heterogeneity of the network, the greater the counterparty credit risk contagion threshold and the lower the counterparty credit risk contagion scale. (4)The degree distribution of counterparty credit network in the CRT market significantly affects the credit risk contagion threshold and scale in the CRT market.

Keywords: Counterparty credit risk; Heterogeneity; Preferential-random mixing attachment; SIRS model; Network stochastic dominance (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:520:y:2019:i:c:p:458-480

DOI: 10.1016/j.physa.2019.01.018

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