Credit risk—A structural model with jumps and correlations

Rudi Schäfer, Markus Sjölin, Andreas Sundin, Michal Wolanski and Thomas Guhr

Physica A: Statistical Mechanics and its Applications, 2007, vol. 383, issue 2, 533-569

Abstract: We set up a structural model to study credit risk for a portfolio containing several or many credit contracts. The model is based on a jump-diffusion process for the risk factors, i.e. for the company assets. We also include correlations between the companies. We discuss that models of this type have much in common with other problems in statistical physics and in the theory of complex systems. We study a simplified version of our model analytically. Furthermore, we perform extensive numerical simulations for the full model. The observables are the loss distribution of the credit portfolio, its moments and other quantities derived thereof. We compile detailed information about the parameter dependence of these observables. In the course of setting up and analyzing our model, we also give a review of credit risk modeling for a physics audience.

Keywords: Credit risk; Econophysics; Stochastic processes (search for similar items in EconPapers)
Date: 2007
References: View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:383:y:2007:i:2:p:533-569

DOI: 10.1016/j.physa.2007.04.053

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