Effects of Economic Interactions on Credit Risk

J. P. L. Hatchett and R. Kuehn

Papers from arXiv.org

Abstract: We study a credit risk model which captures effects of economic interactions on a firm's default probability. Economic interactions are represented as a functionally defined graph, and the existence of both cooperative, and competitive, business relations is taken into account. We provide an analytic solution of the model in a limit where the number of business relations of each company is large, but the overall fraction of the economy with which a given company interacts may be small. While the effects of economic interactions are relatively weak in typical (most probable) scenarios, they are pronounced in situations of economic stress, and thus lead to a substantial fattening of the tails of loss distributions in large loan portfolios. This manifests itself in a pronounced enhancement of the Value at Risk computed for interacting economies in comparison with their non-interacting counterparts.

Date: 2005-12
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/physics/0512155 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:physics/0512155

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().