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Credit contagion in a network of firms with spatial interaction

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  • Diana Barro

    ()
    (Department of Applied Mathematics and SSAV, University of Venice)

  • Antonella Basso

    ()
    (Department of Applied Mathematics and SSAV, University of Venice)

Abstract

In this contribution we carried out a wide simulation analysis in order to study the contagion mechanism induced in a portfolio of bank loans by the presence of business relationships among the positions. To this aim we jointly apply a structural model based on a factor approach extended in order to include the presence of microeconomic relationships that takes into account the counterparty risk, and a network model to describe the business connections among interdependent firms. The network of firms is generated resorting to an entropy spatial interaction model.

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Bibliographic Info

Paper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 186.

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Length: 18 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:vnm:wpaper:186

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Keywords: credit risk; bank loan portfolios; contagion models; entropy spatial models;

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  1. Lucas, André & Klaassen, Pieter & Spreij, Peter, 1999. "An analytic approach to credit risk of large corporate bond and loan portfolios," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0018, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  2. Giesecke, Kay & Weber, Stefan, 2004. "Cyclical correlations, credit contagion, and portfolio losses," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(12), pages 3009-3036, December.
  3. Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Discussion Paper, Tilburg University, Center for Economic Research 2002-16, Tilburg University, Center for Economic Research.
  4. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2006. "Business fluctuations in a credit-network economy," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 370(1), pages 68-74.
  5. Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, Elsevier, vol. 135(2), pages 338-349, December.
  6. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2533-2570, December.
  7. Carling, Kenneth & Lundberg, Sofia, 2005. "Asymmetric information and distance: an empirical assessment of geographical credit rationing," Journal of Economics and Business, Elsevier, Elsevier, vol. 57(1), pages 39-59.
  8. André Lucas & Siem Jan Koopman, 2005. "Business and default cycles for credit risk," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(2), pages 311-323.
  9. Kern, Markus & Rudolph, Bernd, 2001. "Comparative analysis of alternative credit risk models: An application on German middle market loan portfolios," CFS Working Paper Series 2001/03, Center for Financial Studies (CFS).
  10. Diana Barro & Antonella Basso, 2008. "A network of business relations to model counterparty risk," Working Papers, Department of Applied Mathematics, Università Ca' Foscari Venezia 171, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  11. Philipp J. Schönbucher, 2000. "Factor Models for Portofolio Credit Risk," Bonn Econ Discussion Papers, University of Bonn, Germany bgse16_2001, University of Bonn, Germany.
  12. Carling, Kenneth & Rönnegård, Lars & Roszbach, Kasper, 2004. "Is Firm Interdependence within Industries Important for Portfolio Credit Risk?," Working Paper Series 168, Sveriges Riksbank (Central Bank of Sweden).
  13. Egloff, Daniel & Leippold, Markus & Vanini, Paolo, 2007. "A simple model of credit contagion," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(8), pages 2475-2492, August.
  14. Rudi Sch\"afer & Markus Sj\"olin & Andreas Sundin & Michal Wolanski & Thomas Guhr, 2007. "Credit risk - A structural model with jumps and correlations," Papers 0707.3478, arXiv.org, revised Jul 2007.
  15. Diana Barro & Antonella Basso, 2006. "A credit contagion model for loan portfolios in a network of firms with spatial interaction," Working Papers, Department of Applied Mathematics, Università Ca' Foscari Venezia 143, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  16. Neu, Peter & Kühn, Reimer, 2004. "Credit risk enhancement in a network of interdependent firms," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 342(3), pages 639-655.
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Cited by:
  1. Fernandes, Guilherme Barreto & Artes , Rinaldo, 2013. "Spatial correlation in credit risk and its improvement in credit scoring," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_321, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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