Credit Risk in a Network Economy

Henry Schellhorn () and Didier Cossin ()
Additional contact information
Henry Schellhorn: University of Lausanne, FAME and IMD, Lausanne
Didier Cossin: University of Lausanne, FAME and IMD, Lausanne

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: We develop a structural model of credit risk in a network economy. In particular, we are able to account for complex counterparty relationships,where one company may be indirectly affected by the credit risk of another company in the network. In this re-spect,we generalize Jarrow and Yu (2001)and Collin-Dufresne,Goldstein and Hugonnier (2003),but do so in the rich context of a structural form model. We provide closed form formulae for the price of risky debt and equity,which depend upon the lending/borrowing relationships in the economy. Our model applies to completely general lender/borrower relationships,including looping relationships. Our formulae can apply to cases where not only ?nancial ?ows but also operations are dependent across ?rms. In order to achieve these results,we use queueing theory. This paper thus represents one of the ?rst applications of queueing theory to ?nance.

Keywords: Credit Risk; Capital Structure; Queueing Networks (search for similar items in EconPapers)
JEL-codes: C16 C65 G12 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-acc, nep-fin and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.swissfinanceinstitute.ch/rp106.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.swissfinanceinstitute.ch/rp106.pdf [301 Moved Permanently]--> https://www.sfi.ch/rp106.pdf [302 Found]--> https://www.sfi.ch/en/rp106.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp106

Access Statistics for this paper

More papers in FAME Research Paper Series from International Center for Financial Asset Management and Engineering Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().