Identifiability of Contagion Components amid Environmental Fluctuations in Aggregated Default Counts

Shintaro Mori

Papers from arXiv.org

Abstract: Can contagion components be identified in aggregated default counts when default probabilities fluctuate with the economic environment? We study this question as an identifiability problem for coarse-grained default-count distributions. We adopt a binomial mixture with a Probit--Normal default probability as a parsimonious null model for environmental fluctuations and test whether contagion provides additional identifiable structure. Against this null, we consider two contagion mechanisms: cumulative contagion in the Davis--Lo model and threshold-type contagion in the Torri model. The Davis--Lo extension substantially improves the likelihood and information criteria for the ALL and speculative-grade classes, whereas the Torri component is largely absorbed by environmental heterogeneity; evidence is weaker for investment-grade defaults. As a robustness test, we replace the Gaussian environmental distribution by a two-component Gaussian mixture, and the Davis--Lo advantage persists for ALL and speculative-grade defaults. These results indicate that cumulative-contagion signatures remain distinguishable from the environmental null models considered here in the ALL and speculative-grade classes, even under annual aggregation.

Date: 2026-04, Revised 2026-09
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