From Fault Tree to Credit Risk Assessment: A Case Study

Hayette Gatfaoui

Econometrics from University Library of Munich, Germany

Abstract: Reliability has been largely applied to industrial systems in order to study the various possibilities of systems’ failure. The goal is to establish the chain of events leading to any system’s failure, namely the top event. Looking for the minimal paths leading to any system’s fault allows for a better control of systems’ safety. To this end, reliability is composed of a static approach (see Ngom et al. [1999] for example) as well as a dynamic approach (see Reory & Andrews [2003] for example). In this paper, we extend the framework stated by Gatfaoui (2003) allowing for the application of fault tree theory to credit risk assessment. The author explains that fault tree is one alternative approach of reliability, which matches default risk analysis in a simple framework. Our extension includes other distributions of probability to model the lifetimes of French firms while studying the related empirical default probabilities. We use mainly, but not exclusively, continuous distributions for which the exponential law used by Gatfaoui (2003) constitutes a particular case. Our results exhibit both the exponential nature of French .rms. lifetimes as well as strong convex and fast decreasing time varying failure rates. Such a feature has some non- negligible impact insofar as it characterizes corresponding credit spreads’ Term structure.

Keywords: credit risk; default probability; failure rate; fault tree; reliability; survival probability (search for similar items in EconPapers)
JEL-codes: C1 D8 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005-09-02
New Economics Papers: this item is included in nep-fmk and nep-rmg
Note: Type of Document - pdf; pages: 32
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Related works:
Working Paper: From Fault Tree to Credit Risk Assessment: A Case Study (2008)
Working Paper: From Fault Tree to Credit Risk Assessment: A Case Study (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0509002

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