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Credit contagion in a network of firms with spatial interaction

  • Barro, Diana
  • Basso, Antonella

This contribution studies the effects of credit contagion on the credit risk of a portfolio of bank loans. To this aim we introduce a model that takes into account the counterparty risk in a network of interdependent firms that describes the presence of business relations among different firms. The location of the firms is simulated with probabilities computed using an entropy spatial interaction model. By means of a wide simulation analysis we investigate the behavior of the model proposed and study the effects of default contagion on the loss distribution of a portfolio of bank loans.

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File URL: http://www.sciencedirect.com/science/article/pii/S0377-2217(10)00025-1
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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 205 (2010)
Issue (Month): 2 (September)
Pages: 459-468

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Handle: RePEc:eee:ejores:v:205:y:2010:i:2:p:459-468
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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  8. Neu, Peter & Kühn, Reimer, 2004. "Credit risk enhancement in a network of interdependent firms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 342(3), pages 639-655.
  9. Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc.
  10. Murat Celik, H. & Guldmann, Jean-Michel, 2007. "Spatial interaction modeling of interregional commodity flows," Socio-Economic Planning Sciences, Elsevier, vol. 41(2), pages 147-162, June.
  11. Hans Degryse & Steven Ongena, 2002. "Distance, Lending Relationships, and Competition," CSEF Working Papers 80, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  13. 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).
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  17. Diana Barro & Antonella Basso, 2008. "A network of business relations to model counterparty risk," Working Papers 171, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  18. Didier Cossin & Henry Schellhorn, 2007. "Credit Risk in a Network Economy," Management Science, INFORMS, vol. 53(10), pages 1604-1617, October.
  19. Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, vol. 135(2), pages 338-349, December.
  20. Lucas, André & Klaassen, Pieter & Spreij, Peter, 1999. "An analytic approach to credit risk of large corporate bond and loan portfolios," Serie Research Memoranda 0018, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  21. Giesecke, Kay & Weber, Stefan, 2004. "Cyclical correlations, credit contagion, and portfolio losses," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3009-3036, December.
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