Title: A Markovian network model for default risk management

Authors: Wai-Ki Ching, Ho-Yin Leung, Hao Jiang, Liang Sun, Tak-Kuen Siu

Addresses: Advanced Modelling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong. ' Advanced Modelling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong. ' Advanced Modelling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong. ' Advanced Modelling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong. ' Faculty of Business and Economics, Department of Actuarial Studies and Centre of Financial Risk, Macquarie University, Sydney, NSW 2109, Australia

Abstract: In this paper, we study the problem of modelling the dependence of defaults in several sectors. We consider a network-based model for the default data sequences and model the sequences by a Markov chain model. The new model provides a flexible paradigm for portfolio credit risk assessment. We evaluate two important risk measures, namely, crisis value-at-risk (CRVaR) and crisis expected shortfall (CRES). Numerical experiments are given to illustrate the practical implementation of the model. We also perform empirical studies of the model using real default data and analyse the empirical behaviours of the risk measures arising from the model.

Keywords: value-at-risk; VaR; crisis expected shortfall; Markov chain model; defaults; network of sectors; default risk management; modelling; portfolio credit risks; risk assessment.

DOI: 10.1504/IJIEI.2010.033532

International Journal of Intelligent Engineering Informatics, 2010 Vol.1 No.1, pp.104 - 124

Published online: 02 Jun 2010 *

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