A Default System with Overspilling Contagion

28 Pages Posted: 25 Sep 2017 Last revised: 13 Jan 2022

See all articles by Delia Coculescu

Delia Coculescu

University of Zurich - Department of Banking and Finance

Date Written: September 22, 2017

Abstract

In classical contagion models, default systems are Markovian conditionally on the observation of their stochastic environment, with interacting intensities. This necessitates that the environment evolves autonomously and is not influenced by the history of the default events. We extend the classical literature and allow a default system to have a contagious impact on its environment. In our framework, contagion can either be contained within the default system (i.e., direct contagion from a counterparty to another) or spill from the default system over its environment (indirect contagion).

This type of model is of interest whenever one wants to capture within a model possible impacts of the defaults of a class of debtors on the more global economy and vice versa.

Keywords: default risk, default contagion, interacting intensities, non Markovian model

JEL Classification: C63, G12

Suggested Citation

Coculescu, Delia, A Default System with Overspilling Contagion (September 22, 2017). Available at SSRN: https://ssrn.com/abstract=3041348 or http://dx.doi.org/10.2139/ssrn.3041348

Delia Coculescu (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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