Advanced Search
MyIDEAS: Login to save this paper or follow this series

Credit Risk in a Network Economy

Contents:

Author Info

  • Henry Schellhorn

    ()
    (University of Lausanne, FAME and IMD, Lausanne)

  • Didier Cossin

    ()
    (University of Lausanne, FAME and IMD, Lausanne)

Registered author(s):

    Abstract

    We develop a structural model of credit risk in a network economy. In particular, we are able to account for complex counterparty relationships,where one company may be indirectly affected by the credit risk of another company in the network. In this re-spect,we generalize Jarrow and Yu (2001)and Collin-Dufresne,Goldstein and Hugonnier (2003),but do so in the rich context of a structural form model. We provide closed form formulae for the price of risky debt and equity,which depend upon the lending/borrowing relationships in the economy. Our model applies to completely general lender/borrower relationships,including looping relationships. Our formulae can apply to cases where not only ?nancial ?ows but also operations are dependent across ?rms. In order to achieve these results,we use queueing theory. This paper thus represents one of the ?rst applications of queueing theory to ?nance.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.swissfinanceinstitute.ch/rp106.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp106.

    as in new window
    Length:
    Date of creation: Mar 2004
    Date of revision:
    Handle: RePEc:fam:rpseri:rp106

    Contact details of provider:
    Postal: 40 bd. du Pont d'Arve, Case postale 3, CH - 1211 Geneva 4
    Phone: 41 22 / 312 09 61
    Fax: 41 22 / 312 10 26
    Web page: http://www.swissfinanceinstitute.ch
    More information through EDIRC

    Related research

    Keywords: Credit Risk; Capital Structure; Queueing Networks;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
    2. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    3. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
    4. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-53.
    5. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    6. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
    7. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
    8. Robert A. Jarrow & Xing Jin & Dilip B. Madan, 1999. "The Second Fundamental Theorem of Asset Pricing," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 255-273.
    9. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
    10. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    11. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Mizgier, Kamil J. & Wagner, Stephan M. & Holyst, Janusz A., 2012. "Modeling defaults of companies in multi-stage supply chain networks," International Journal of Production Economics, Elsevier, vol. 135(1), pages 14-23.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:fam:rpseri:rp106. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.