New model reveals how market contagion drives credit derivatives pricing!
A new model for predicting credit defaults considers how economic factors and the spread of defaults among borrowers affect the risk of default. The model uses a special type of mathematical chain to track which borrowers have defaulted. By analyzing this data, researchers were able to create formulas to price certain financial products called synthetic collateralized debt obligations. They tested the model using real market data and found that when multiple borrowers default at the same time, it poses the biggest risk for investors.