Article 

Cossin, Didier, Schellhorn, Henri,  Credit risk in a network economy
Management science , 2007, p. 1604-1617
The authors develop a structural model of credit risk in a network economy, where any firm can lend to any other firm, so that each firm is subject to counterparty risk either from direct borrowers or from remote firms in the network. This model takes into account the role of each firm's cash management. They show that they can obtain a semiclosed form formula for the price of debt and equity when cash accounts are buffers to bankruptcy risk. As in other structural models, the strategic bankruptcy decision of shareholders drives credit spreads, and differentiates debt from equity. Cash-flow risk also causes credit-risk interdependencies between firms. Their model applies to the case where not only financial flows but also operations are dependent across firms. They use queueing theory to obtain their semiclosed form formulae in steady state. They perform a simplified implementation of their model to the U.S. automotive industry, and show how they infer the impact on a supplier's credit spreads of revenue changes in a manufacturer or even in a large car dealer. They also obtain prices for first-to-default and second-to-default basket credit default swaps.

ISBN :
Keywords : CREDIT, RISK, CAPITAL STRUCTURE OF COMPANIES, QUEUING THEORY
Language : English
Storage : InfoDesk
Issue : vol. 53, no. 10

Status : on site consultation only