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An autoregressive conditional duration model of credit‐risk contagion

Author

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  • Sergio M. Focardi
  • Frank J. Fabozzi

Abstract

Purpose - This paper seeks to discuss a modeling tool for explaining credit‐risk contagion in credit portfolios. Design/methodology/approach - Presents a “collective risk” model that models the credit risk of a portfolio, an approach typical of insurance mathematics. Findings - ACD models are self‐exciting point processes that offer a good representation of cascading phenomena due to bankruptcies. In other words, they model how a credit event might trigger other credit events. The model herein discussed is proposed as a robust global model of the aggregate loss of a credit portfolio; only a small number of parameters are required to estimate aggregate loss. Originality/value - Discusses a modeling tool for explaining credit‐risk contagion in credit portfolios.

Suggested Citation

  • Sergio M. Focardi & Frank J. Fabozzi, 2005. "An autoregressive conditional duration model of credit‐risk contagion," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 6(3), pages 208-225, July.
    • Handle: RePEc:eme:jrfpps:15265940510599829
    DOI: 10.1108/15265940510599829
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    Keywords

    Credit; Financial risk;

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