Risk assessment based on the analysis of the impact of contagion flow

Chanaka Edirisinghe, Aparna Gupta and Wendy Roth

Journal of Banking & Finance, 2015, vol. 60, issue C, 209-223

Abstract: This paper presents a new framework to model and calibrate the process of firm value evolution when an unanticipated exogenous event impacting one firm can contagiously affect other firms. The nature of propagation of such contagion is determined by the underlying connections between firms, which can adversely affect the tail risks of firm value, hence the securities issued by the firm. This paper combines the insights gained from the existing firm-value models and historical events into a structural model for flow of contagion among firms using a network-based approach. Rather than using stylized networks, we develop a data-driven approach for network construction where we define and calibrate several contagion variables to model the spread of contagion. This framework is applied for assessing firm-level risk under downside risk measures. Using actual data, our model illustrates how connections between firms can lead to heavy-tailed default distributions and default clustering observed in practice.

Keywords: Contagion; Bond defaults; Factor models; Firm-level risk assessment (search for similar items in EconPapers)
JEL-codes: C63 D85 G32 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:60:y:2015:i:c:p:209-223

DOI: 10.1016/j.jbankfin.2015.08.015

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