Credit Contagion and Credit Risk
by Jonathan Hatchett of Hymans Robertson LLP, and
September 20, 2006
Abstract: We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be small in typical (most probable) scenarios they are magnified, due to feedback, by situations of economic stress, which in turn leads to fatter tails in loss distributions of large loan portfolios.
PACS: 02.50.-r, 05.40.-a, 89.65.Gh, 89.75.Da.
Published in: Quantitative Finance, Vol. 9, No. 4, (June 2009), pp. 373-382.