Interacting Defaults and Counterparty Risk : a Markovian Approach

@inproceedings{Frey2003InteractingDA,
  title={Interacting Defaults and Counterparty Risk : a Markovian Approach},
  author={R{\"u}diger Frey and Jochen Backhaus},
  year={2003}
}
We consider intensity-based dynamic models for dependent defaults. We generalize the standard reduced-form models and assume that the default intensity of a firm is directly affected by the default of other firms in the portfolio. This interaction between defaults, which is termed counterparty risk in the literature, could be due to direct business relations between firms or due to the impact of defaults on the overall credit climate. We construct and study the model using Markov process… CONTINUE READING

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