On infectious models for dependent default risk

Jiawen Gu; Wai Ki Ching; Tak Kuen Siu

doi:10.1109/CSO.2011.185

On infectious models for dependent default risk

Jiawen Gu^*, Wai Ki Ching, Tak Kuen Siu

^*Corresponding author for this work

Department of Applied Finance

Research output: Chapter in Book/Report/Conference proceeding › Conference proceeding contribution › peer-review

1 Citation (Scopus)

Abstract

Modeling dependent defaults is a key issue in risk measurement and management. In this paper, we introduce a Markovian infectious model to describe the dependent relationship of default processes of credit entities. The key idea of the proposed model is based on the concept of common shocks adopted in the insurance industry. We compare the proposed model to both one-sector and two-sector models considered in the credit literature using real default data. A log-likelihood ratio test is applied to compare the goodness-of- fit of the proposed model. Our empirical results reveal that the proposed model outperforms both the one-sector and two-sector models.

Original language	English
Title of host publication	Proceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011
Editors	Lean Yu, Shouyang Wang, K. K. Lai
Place of Publication	Piscataway, NJ
Publisher	Institute of Electrical and Electronics Engineers (IEEE)
Pages	1196-1200
Number of pages	5
ISBN (Print)	9780769543352
DOIs	https://doi.org/10.1109/CSO.2011.185
Publication status	Published - 2011
Event	4th International Joint Conference on Computational Sciences and Optimization, CSO 2011 - Kunming, Lijiang, Yunnan, China Duration: 15 Apr 2011 → 19 Apr 2011

Other

Other	4th International Joint Conference on Computational Sciences and Optimization, CSO 2011
Country/Territory	China
City	Kunming, Lijiang, Yunnan
Period	15/04/11 → 19/04/11

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10.1109/CSO.2011.185

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title = "On infectious models for dependent default risk",

abstract = "Modeling dependent defaults is a key issue in risk measurement and management. In this paper, we introduce a Markovian infectious model to describe the dependent relationship of default processes of credit entities. The key idea of the proposed model is based on the concept of common shocks adopted in the insurance industry. We compare the proposed model to both one-sector and two-sector models considered in the credit literature using real default data. A log-likelihood ratio test is applied to compare the goodness-of- fit of the proposed model. Our empirical results reveal that the proposed model outperforms both the one-sector and two-sector models.",

author = "Jiawen Gu and Ching, {Wai Ki} and Siu, {Tak Kuen}",

year = "2011",

doi = "10.1109/CSO.2011.185",

language = "English",

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pages = "1196--1200",

editor = "Lean Yu and Shouyang Wang and Lai, {K. K.}",

booktitle = "Proceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011",

publisher = "Institute of Electrical and Electronics Engineers (IEEE)",

address = "United States",

note = "4th International Joint Conference on Computational Sciences and Optimization, CSO 2011 ; Conference date: 15-04-2011 Through 19-04-2011",

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Gu, J, Ching, WK & Siu, TK 2011, On infectious models for dependent default risk. in L Yu, S Wang & KK Lai (eds), Proceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011., 5957868, Institute of Electrical and Electronics Engineers (IEEE), Piscataway, NJ, pp. 1196-1200, 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011, Kunming, Lijiang, Yunnan, China, 15/04/11. https://doi.org/10.1109/CSO.2011.185

On infectious models for dependent default risk. / Gu, Jiawen; Ching, Wai Ki; Siu, Tak Kuen.
Proceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011. ed. / Lean Yu; Shouyang Wang; K. K. Lai. Piscataway, NJ: Institute of Electrical and Electronics Engineers (IEEE), 2011. p. 1196-1200 5957868.

Research output: Chapter in Book/Report/Conference proceeding › Conference proceeding contribution › peer-review

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AU - Ching, Wai Ki

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N2 - Modeling dependent defaults is a key issue in risk measurement and management. In this paper, we introduce a Markovian infectious model to describe the dependent relationship of default processes of credit entities. The key idea of the proposed model is based on the concept of common shocks adopted in the insurance industry. We compare the proposed model to both one-sector and two-sector models considered in the credit literature using real default data. A log-likelihood ratio test is applied to compare the goodness-of- fit of the proposed model. Our empirical results reveal that the proposed model outperforms both the one-sector and two-sector models.

AB - Modeling dependent defaults is a key issue in risk measurement and management. In this paper, we introduce a Markovian infectious model to describe the dependent relationship of default processes of credit entities. The key idea of the proposed model is based on the concept of common shocks adopted in the insurance industry. We compare the proposed model to both one-sector and two-sector models considered in the credit literature using real default data. A log-likelihood ratio test is applied to compare the goodness-of- fit of the proposed model. Our empirical results reveal that the proposed model outperforms both the one-sector and two-sector models.

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Y2 - 15 April 2011 through 19 April 2011

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On infectious models for dependent default risk

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