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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | A default system with overspilling contagion |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Frontiers of Mathematical Finance |
| Publisher | AIMS Press |
| Geographical Reach | international |
| ISSN | 2769-6715 |
| Volume | 3 |
| Number | 1 |
| Page Range | 127 - 162 |
| Date | 2024 |
| Abstract Text | Some dynamical contagion models for default risk have been proposed in the literature, where a system (composed of individual debtors) evolves as a Markov process conditionally on the observation of its stochastic environment, with interacting intensities. The Markovian assumption necessitates that the environment evolves autonomously and is not influenced by the transitions of the system. We extend this classical literature and allow a default system to have a contagious impact on its environment. With a certain probability, the transition of a debtor to the default state has an impact on the system's environment. This in turn affects the transition intensities of the other debtors inside the system. Therefore, in our framework, contagion can either be contained within the default system (i.e., direct contagion from a counterparty to another) or spill from the default system over its environment (indirect contagion). This type of model is of interest whenever one wants to capture within a model possible impacts of the defaults of a class of debtors on the more global economy and vice versa. |
| Free access at | DOI |
| Official URL | https://www.aimsciences.org/article/doi/10.3934/fmf.2024003 |
| Digital Object Identifier | 10.3934/fmf.2024003 |
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