Long range Ising model for credit risk modeling in homogeneous portfolios

2004/01/21 by Jordi Molins, Molins, Jordi, Eduard Vives +1 · 2 citations
Business, Management and Accounting · Economics, Econometrics and Finance · Physics and Astronomy · #Credit Risk and Financial Regulations #Financial Distress and Bankruptcy Prediction #Stochastic processes and financial applications #cond-mat.other #cond-mat.stat-mech #q-fin.RM

paper · pdf · doi:10.48550/arxiv.cond-mat/0401378

4 pages, 3 figures

arxiv created 2004/01/21 · arxiv updated 2016/08/31

Abstract

Within the framework of maximum entropy principle we show that the finite-size long-range Ising model is the adequate model for the description of homogeneous credit portfolios and the computation of credit risk when default correlations between the borrowers are included. The exact analysis of the model suggest that when the correlation increases a first-order-like transition may occur inducing a sudden risk increase. Such a feature is not reproduced by the standard models used in credit risk modeling.

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• Model risk on credit risk
• Non-existence of Markovian time dynamics for graphical models of\n correlated default

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