A Structural Credit Risk Model with Default Contagion

Bud Schiphorst (), Michel Mandjes, Peter Spreij and Erik Winands
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Bud Schiphorst: University of Amsterdam, Korteweg-de Vries Institute for Mathematics
Michel Mandjes: University of Amsterdam, Korteweg-de Vries Institute for Mathematics
Peter Spreij: University of Amsterdam, Korteweg-de Vries Institute for Mathematics
Erik Winands: University of Amsterdam, Korteweg-de Vries Institute for Mathematics

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2024, pp 280-285 from Springer

Abstract: Abstract Structural threshold models are common industry practice for modelling portfolio credit risk, but often only consider default dependence via underlying common factors. We consider a structural model extension that allows for additionally incorporating default contagion effects. A simulation study illustrates that ignoring default contagion effects may lead to significant underestimation of portfolio tail risk. As a key contribution, we propose a procedure for estimating default contagion parameters from historical default probability data.

Keywords: portfolio credit risk; default contagion; structural model (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-64273-9_46

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DOI: 10.1007/978-3-031-64273-9_46

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