Credit default model for a dynamically changing economy
2008 (English)Report (Other academic)
We propose a model describing an economy where companies may default due to contagion. By using standard approximation results for stochastic process we are able to describe the features of the model. It turns out that the model reproduces the oscillations in the default rates that has been observed empirically. That is, we have an intrinsic oscillation in the economic system without applying any external macroeconomic force. These oscillations can be understood as cleansing of the unhealthy companies during a recession and the recession ending when sufficiently many of the unhealthy companies have left the economy. This is important both from a risk management perspective as well as from a policy perspective since it shows that contagious defaults may help to explain the oscillations of business cycles. We also investigate the first-passage times of the default process, using this as a proxy for the time to a recession.
Place, publisher, year, edition, pages
2008. , 14 p.
, ISSN 1650-0377
Probability Theory and Statistics
IdentifiersURN: urn:nbn:se:su:diva-16389OAI: oai:DiVA.org:su-16389DiVA: diva2:182909