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Long range Ising model for credit risk modeling in homogeneous portfolios

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  • Jordi Molins
  • Eduard Vives

Abstract

Within the framework of maximum entropy principle we show that the finite-size long-range Ising model is the adequate model for the description of homogeneous credit portfolios and the computation of credit risk when default correlations between the borrowers are included. The exact analysis of the model suggest that when the correlation increases a first-order-like transition may occur inducing a sudden risk increase. Such a feature is not reproduced by the standard models used in credit risk modeling.

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  • Jordi Molins & Eduard Vives, 2004. "Long range Ising model for credit risk modeling in homogeneous portfolios," Papers cond-mat/0401378, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0401378
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    Cited by:

    1. K. Kitsukawa & S. Mori & M. Hisakado, 2006. "Evaluation of Tranche in Securitization and Long-range Ising Model," Papers physics/0603040, arXiv.org, revised Sep 2006.
    2. Situngkir, Hokky & Surya, Yohanes, 2006. "Kerangka Kerja Ekonofisika dalam Basel II," MPRA Paper 896, University Library of Munich, Germany.
    3. Klaus Rheinberger & Martin Summer, 2008. "Credit portfolio risk and asset price cycles," Computational Management Science, Springer, vol. 5(4), pages 337-354, October.
    4. Kitsukawa, K. & Mori, S. & Hisakado, M., 2006. "Evaluation of tranche in securitization and long-range Ising model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(1), pages 191-206.

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