Structural default model with mutual obligations

Andrey Itkin () and Alexander Lipton

Papers from arXiv.org

Abstract: This paper considers mutual obligations in the interconnected bank system and analyzes their influence on joint and marginal survival probabilities as well as CDS and FTD prices for the individual banks. To make the role of mutual obligations more transparent, a simple structural default model with banks' assets driven by correlated multidimensional Brownian motion with drift is considered. This model enables a closed form representation for many quantities of interest, at least in a 2D case, to be obtained, and moreover, model calibration is provided. Finally, we demonstrate that mutual obligations have to be taken into account in order to get correct values for model parameters.

Date: 2015-05
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (4)

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http://arxiv.org/pdf/1505.02039 Latest version (application/pdf)

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Journal Article: Structural default model with mutual obligations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1505.02039

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