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From Fault Tree to Credit Risk Assessment: A Case Study

Author

Listed:
  • Hayette Gatfaoui

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

Reliability has been largely applied to industrial systems in order to study the various possibilities of systems' failure. It targets the chain of events leading to any system's failure, namely the top event. Looking for the minimal paths yielding any system's fault allows for a better control of systems' safety. To this end, reliability is composed of a static approach (see Ngom et al. [1999] for example) as well as a dynamic approach (see Reory and Andrews [2006] for example). In this paper, we extend the framework of Gatfaoui (2006) who applies fault tree theory to credit risk assessment. The author explains that fault tree is one alternative approach of reliability, which matches default risk analysis in a simple framework. Our extension includes other distributions of probability to model the lifetimes of French firms while studying the related empirical default probabilities. We use mainly, but not exclusively, continuous distributions for which the exponential law used by Gatfaoui (2006) constitutes a particular case. Our results exhibit both the exponential nature of French firms' lifetimes as well as strong convex and fast decreasing time varying failure rates. Such a feature has some non-negligible impact insofar as it characterizes corresponding credit spreads' term structure.

Suggested Citation

  • Hayette Gatfaoui, 2008. "From Fault Tree to Credit Risk Assessment: A Case Study," Post-Print hal-00564963, HAL.
    • Handle: RePEc:hal:journl:hal-00564963
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    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    6. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
    7. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515, World Scientific Publishing Co. Pte. Ltd..
    8. Hayette Gatfaoui, 2003. "From Fault Tree to Credit Risk Assessment: An Empirical Attempt," Risk and Insurance 0308003, University Library of Munich, Germany.
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    More about this item

    Keywords

    Credit risk; default probability; failure rate; fault tree; reliability; survival;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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