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Modelling cascading effects for systemic risk: Properties of the Freund copula

Author

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  • Guzmics Sándor

    (University of Vienna. Department of Statistics and Operations Research (DSOR), Oskar Morgenstern Platz 1, A-1090Wien-Vienna, Austria)

  • Pflug Georg Ch.

    (DSOR and International Institute for Applied Systems Analysis (IIASA),Laxenburg, Austria)

Abstract

We consider a dependent lifetime model for systemic risk, whose basic idea was for the first time presented by Freund. This model allows to model cascading effects of defaults for arbitrarily many economic agents. We study in particular the pertaining bivariate copula function. This copula does not have a closed form and does not belong to the class of Archimedean copulas, either.We derive some monotonicity properties of it and show how to use this copula for modelling the cascade effect implicitly contained in observed CDS spreads.

Suggested Citation

  • Guzmics Sándor & Pflug Georg Ch., 2019. "Modelling cascading effects for systemic risk: Properties of the Freund copula," Dependence Modeling, De Gruyter, vol. 7(1), pages 24-44, February.
    • Handle: RePEc:vrs:demode:v:7:y:2019:i:1:p:24-44:n:2
    DOI: 10.1515/demo-2019-0002
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    References listed on IDEAS

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    1. Fan Yu, 2007. "Correlated Defaults In Intensity‐Based Models," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 155-173, April.
    2. Georg Ch. Pflug & Alois Pichler, 2018. "Systemic risk and copula models," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(2), pages 465-483, June.
    3. Georg Ch Pflug & Werner Römisch, 2007. "Modeling, Measuring and Managing Risk," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6478, August.
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