Stochastic cascades, credit contagion, and large portfolio losses

geoff. — Tue, 30 Sep 2008 08:14:11 -0800

"In the limit of an infinite economy, the number of initial downgrades is Poisson distributed. This captures the idea that the shock initially affects only a small number of firms. Nonetheless, the distribution of the total number of defaults has slowly decaying tails ... A firm might well be able to absorb its shock, but it might not be able to absorb both the shock and the resulting deterioration in the average rating. The initial downgrades may thus trigger additional defaults that, in turn, further deteriorate the average rating, and so on. In a large economy, this cascade can be described by a branching process." Ulrich Horst, Journal of Economic Behavior & Organization, 2007. (Internet supplement!) More from Hurst on his website, this is the best description of the credit crisis I have yet to come across. Here's part of the conclusion: "We characterized the tail behavior of the distribution of aggregate portfolio losses. If the interaction between firms are too strong, then aggregate losses turned out to be heavy-tailed even if individual losses are thin-tailed. This illustrates that counterparty relationships are in fact an additional source of intrinsic risk that should be accounted for. However, the risk can be considerably reduced if the firms’ financial standing is measured on a finer scale. In the limiting case of continuous adjustments, the additional risk is simply specified by the size of the external shock." The solution to bad models? More models!

Subprime contagion

wallstreet1929 — Sat, 11 Aug 2007 22:24:34 -0800

This isn't 1998. There's no model for what's happening now in the housing and mortgage industries. 116 mortgage lenders have imploded since 2006. 11 hedge funds have imploded in just the last couple months. Time to warm up the helicopters?

Irontom — Thu, 25 Jul 2002 06:27:59 -0800

A New Way to Catch Hepatitis
"Israeli doctors have discovered a gruesome new way to catch hepatitis and possibly other blood-borne diseases - from the flying bone fragments of suicide bombers." (empahasis added)

MetaFilter posts tagged with contagion

Stochastic cascades, credit contagion, and large portfolio losses

Subprime contagion