An autoregressive conditional duration model of credit‐risk contagion

Abstract

Purpose

This paper seeks to discuss a modeling tool for explaining credit‐risk contagion in credit portfolios.

Design/methodology/approach

Presents a “collective risk” model that models the credit risk of a portfolio, an approach typical of insurance mathematics.

Findings

ACD models are self‐exciting point processes that offer a good representation of cascading phenomena due to bankruptcies. In other words, they model how a credit event might trigger other credit events. The model herein discussed is proposed as a robust global model of the aggregate loss of a credit portfolio; only a small number of parameters are required to estimate aggregate loss.

Originality/value

Discusses a modeling tool for explaining credit‐risk contagion in credit portfolios.

Citation

Focardi, S.M. and Fabozzi, F.J. (2005), "An autoregressive conditional duration model of credit‐risk contagion", Journal of Risk Finance, Vol. 6 No. 3, pp. 208-225. https://doi.org/10.1108/15265940510599829