A Markov Chain Model for Contagion

Risks, Vol. 2, No. 4, Page 434-455, 2014

25 Pages Posted: 6 Nov 2014

See all articles by Angelos Dassios

Angelos Dassios

London School of Economics & Political Science (LSE) - Department of Statistics

Hongbiao Zhao

Shanghai University of Finance and Economics; London School of Economics & Political Science (LSE)

Date Written: November 5, 2014

Abstract

We introduce a bivariate Markov chain counting process with contagion for modelling the clustering arrival of loss claims with delayed settlement for an insurance company. It is a general continuous-time model framework that also has the potential to be applicable to modelling the clustering arrival of events, such as jumps, bankruptcies, crises and catastrophes in finance, insurance and economics with both internal contagion risk and external common risk. Key distributional properties, such as the moments and probability generating functions, for this process are derived. Some special cases with explicit results and numerical examples and the motivation for further actuarial applications are also discussed. The model can be considered a generalisation of the dynamic contagion process introduced by Dassios and Zhao (2011).

Keywords: Risk model, Contagion risk, Bivariate point process, Markov chain model, Discretised dynamic contagion process, Dynamic contagion process

JEL Classification: C10

Suggested Citation

Dassios, Angelos and Zhao, Hongbiao, A Markov Chain Model for Contagion (November 5, 2014). Risks, Vol. 2, No. 4, Page 434-455, 2014, Available at SSRN: https://ssrn.com/abstract=2519493

Angelos Dassios

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Hongbiao Zhao (Contact Author)

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road
Yangpu District
Shanghai, Shanghai 200433
China

HOME PAGE: http://hongbiaozhao.weebly.com/

London School of Economics & Political Science (LSE)

Houghton Street
London, WC2A 2AE
United Kingdom

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