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Correlated Risks vs Contagion in Stochastic Transition Models

Author

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  • Patrick Gagliardini

    (University of Lugano)

  • Christian Gouriéroux

    (CREST, University of Toronto)

Abstract

There is a growing literature on the possibility to identify correlation and contagion in qualitative risk analysis. Our paper considers this question by means of a model describing the joint dynamics of a set of individual binary processes. The two admissible values correspond to bad and good risk states of an individual. The risk correlation and its time dependence are captured by introducing a dynamic frailty, whereas the contagion passes through the effect of the lagged number of individuals in the bad risk state. We study carefully the dynamic properties of the joint process. Then, we focus on the limiting case of large populations (portfolios) and reconcile the microscopic and macroscopic dynamic views of the risk. The difficulty to identify in finite sample risk correlation and contagion is illustrated by means of Monte-Carlo simulations

Suggested Citation

  • Patrick Gagliardini & Christian Gouriéroux, 2012. "Correlated Risks vs Contagion in Stochastic Transition Models," Working Papers 2012-07, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2012-07
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    Cited by:

    1. C. Gouriéroux & J.‐C. Héam & A. Monfort, 2012. "Bilateral exposures and systemic solvency risk," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(4), pages 1273-1309, November.
    2. Gouriéroux, C. & Monfort, A. & Renne, J.P., 2014. "Pricing default events: Surprise, exogeneity and contagion," Journal of Econometrics, Elsevier, vol. 182(2), pages 397-411.
    3. Choe, Geon Ho & Choi, So Eun & Jang, Hyun Jin, 2020. "Assessment of time-varying systemic risk in credit default swap indices: Simultaneity and contagiousness," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    4. Das, Bikramjit & Fasen-Hartmann, Vicky, 2018. "Risk contagion under regular variation and asymptotic tail independence," Journal of Multivariate Analysis, Elsevier, vol. 165(C), pages 194-215.
    5. Serge Darolles & Patrick Gagliardini & Christian Gouriéroux, 2012. "Survival of Hedge Funds : Frailty vs Contagion," Working Papers 2012-36, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    Risk Dependence; Frailty; Systematic Risk; Contagion; Count Process; INAR Model; Compound Autoregressive Process; Affine Model; Credit Risk; Granularity Adjustment; Stochastic Intensity.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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