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A Structural Credit Risk Model with Default Contagion

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Bud Schiphorst

    (University of Amsterdam, Korteweg-de Vries Institute for Mathematics
    Rabobank)

  • Michel Mandjes

    (University of Amsterdam, Korteweg-de Vries Institute for Mathematics
    Leiden University, Mathematical Institute)

  • Peter Spreij

    (University of Amsterdam, Korteweg-de Vries Institute for Mathematics
    Radboud University, IMAPP)

  • Erik Winands

    (University of Amsterdam, Korteweg-de Vries Institute for Mathematics
    Rabobank)

Abstract

Structural threshold models are common industry practice for modelling portfolio credit risk, but often only consider default dependence via underlying common factors. We consider a structural model extension that allows for additionally incorporating default contagion effects. A simulation study illustrates that ignoring default contagion effects may lead to significant underestimation of portfolio tail risk. As a key contribution, we propose a procedure for estimating default contagion parameters from historical default probability data.

Suggested Citation

  • Bud Schiphorst & Michel Mandjes & Peter Spreij & Erik Winands, 2024. "A Structural Credit Risk Model with Default Contagion," Springer Books, in: Marco Corazza & Frédéric Gannon & Florence Legros & Claudio Pizzi & Vincent Touzé (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 280-285, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-64273-9_46
    DOI: 10.1007/978-3-031-64273-9_46
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