Structural default model with mutual obligations
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11147_2016_9123_ReferencePDF.pdf
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Author(s)
Itkin, Andrey
Lipton, Alexander
Date Issued
June 2016
Journal
Review of Derivatives Research
Publisher
Springer US
Citation
Itkin, Andrey, and Alexander Lipton. “Structural Default Model with Mutual Obligations.” Review of Derivatives Research 20, no. 1 (June 6, 2016): 15–46.
Version
Author's final manuscript
Abstract
In this paper we consider mutual obligations in an interconnected bank system and analyze their impact on the joint and marginal survival probabilities for individual banks. We also calculate prices of the corresponding credit default swaps and first-to-default swaps. To make the role of mutual obligations more transparent, we develop a simple structural default model with banks’ assets driven by correlated multidimensional Brownian motion with drift. We calculate closed form expressions for many quantities of interest and use them for the efficient model calibration. We demonstrate that mutual obligations have noticeable impact on the system behavior.
MIT Department
MIT Connection Science (Research institute)
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1007/s11147-016-9123-1
