A Credit Contagion Model for Loan Portfolios in a Network of Firms with Spatial Interaction
24 Pages Posted: 15 Nov 2006
Date Written: September 2006
This contribution studies the effects of credit contagion on the credit risk of a portfolio of bank loans. To this aim we introduce a model that takes into account the counterparty risk in a network of interdependent firms that describes the presence of business relations among different firms. The location of the firms is simulated with probabilities computed using an entropy spatial interaction model. By means of a wide simulation analysis we use the model proposed to study the effects of default contagion on the loss distribution of a portfolio.
Keywords: credit risk, bank loan portfolios, contagion
JEL Classification: G33, G21, C15
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