Dynamic credit contagion and aggregate loss in networks

Xiaoyuan Zhang and Tianqi Zhang

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: We develop a dynamic model to illustrate the credit risk contagion mechanism caused by interaction between firms. Specifically, we formulate the sources of risk into idiosyncratic risk and contagion risk, and introduce recovery ability to model the scenario of a firm changing from default into normal status. Our result shows that there always exists a steady state in a network under some trivial conditions. For quasi-regular networks and bipartite networks, the expected aggregate loss remains unchanged as long as the product of the contagion probability and the partner number is fixed.

Keywords: Credit risk; Networks; Expected aggregate loss; Dynamic contagion (search for similar items in EconPapers)
JEL-codes: G33 M21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822001139

DOI: 10.1016/j.najef.2022.101770

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