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Credit Risk in a Network Economy


Author Info

  • Henry Schellhorn

    (University of Lausanne, FAME and IMD, Lausanne)

  • Didier Cossin

    (University of Lausanne, FAME and IMD, Lausanne)

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    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.

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    Bibliographic Info

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

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    Date of creation: Mar 2004
    Date of revision:
    Handle: RePEc:fam:rpseri:rp106

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    Related research

    Keywords: Credit Risk; Capital Structure; Queueing Networks;

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