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Credit contagion in a network of firms with spatial interaction

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  • Barro, Diana
  • Basso, Antonella

Abstract

This contribution studies the effects of credit contagion on the credit risk of a portfolio of bank loans. To this aim we introduce a model that takes into account the counterparty risk in a network of interdependent firms that describes the presence of business relations among different firms. The location of the firms is simulated with probabilities computed using an entropy spatial interaction model. By means of a wide simulation analysis we investigate the behavior of the model proposed and study the effects of default contagion on the loss distribution of a portfolio of bank loans.

Suggested Citation

  • Barro, Diana & Basso, Antonella, 2010. "Credit contagion in a network of firms with spatial interaction," European Journal of Operational Research, Elsevier, vol. 205(2), pages 459-468, September.
    • Handle: RePEc:eee:ejores:v:205:y:2010:i:2:p:459-468
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    More about this item

    Keywords

    Finance Credit risk Bank loan portfolios Contagion models Entropy spatial models;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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