A Credit Contagion Model for Loan Portfolios in a Network of Firms with Spatial Interaction

This contribution studies the efiects of credit contagion on the credit risk of a portfolio of bank loans. To this aim we introduce a model that takes into account the counterparty risk in a network of interdependent flrms that describes the presence of business relations among difierent flrms. The location of the flrms is simulated with probabilities computed using an entropy spatial interaction model. By means of a wide simulation analysis we use the model proposed to study the efiects of default contagion on the loss distribution of a portfolio.