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A nonlinear dynamic model for credit risk contagion

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  • Fanelli, Viviana
  • Maddalena, Lucia

Abstract

We consider the credit risk transfer market, where several financial agents interact with each other and generate complex nonlinear relations. All these market participants are defaultable and when one of them defaults, the credit risk contagion can be described by a nonlinear dynamic problem. We propose a particular time delay Susceptible–Infected–Recovered model to investigate and describe the credit risk contagion in the market. The time delay represents the temporary immunity time lag before a bank becomes defaultable. We analytically study the model and find the steady states according to different values of time delay and different bank support policies.

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  • Fanelli, Viviana & Maddalena, Lucia, 2020. "A nonlinear dynamic model for credit risk contagion," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 174(C), pages 45-58.
    • Handle: RePEc:eee:matcom:v:174:y:2020:i:c:p:45-58
    DOI: 10.1016/j.matcom.2020.02.010
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