CFE 2015: Start Registration
View Submission - CFE
A0790
Title: Modeling sovereign risk with correlated stoschastic processes Authors:  Laura Parisi - University of Pavia (Italy)
Paolo Giudici - University of Pavia (Italy) [presenting]
Abstract: We use stochastic processes and correlation networks to model systemic risk between the economies of the European monetary union, in the post crisis period. For each country, we consider a financial leverage ratio and model the time dynamic of its two components by means of a linear combination of two stochastic equations: a Eurozone systematic process and a country specific idiosyncratic process. Doing so, we model debt sustainability in terms of both the financial and the real side. We provide an estimation model for the parameters of the processes and the resulting default probabilities. Systemic risk is estimated by means of the estimated marginal and partial correlation matrix that is a function of the estimated parameters of the process.