On infectious models for dependent default risk

Jiawen Gu*, Wai Ki Ching, Tak Kuen Siu

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contribution

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 languageEnglish
Title of host publicationProceedings - 4th International Joint Conference on Computational Sciences and Optimization, CSO 2011
EditorsLean Yu, Shouyang Wang, K. K. Lai
Place of PublicationPiscataway, NJ
PublisherInstitute of Electrical and Electronics Engineers (IEEE)
Pages1196-1200
Number of pages5
ISBN (Print)9780769543352
DOIs
Publication statusPublished - 2011
Event4th International Joint Conference on Computational Sciences and Optimization, CSO 2011 - Kunming, Lijiang, Yunnan, China
Duration: 15 Apr 201119 Apr 2011

Other

Other4th International Joint Conference on Computational Sciences and Optimization, CSO 2011
CountryChina
CityKunming, Lijiang, Yunnan
Period15/04/1119/04/11

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