Dynamics of multivariate default system in random environment

TL;DR

This paper analyzes the behavior of multivariate default systems influenced by random environmental factors, using measure change techniques and connecting to credit risk modeling, with special focus on failure phenomena in reliability systems.

Contribution

It introduces a general framework for modeling multivariate defaults in random environments and links it with density approaches in credit risk, extending classical reliability system analysis.

Findings

Established a measure change approach for default system dynamics

Linked default modeling with credit risk density methods

Analyzed failure phenomena in reliability systems without environmental info

Abstract

We consider a multivariate default system where random environmental information is available. We study the dynamics of the system in a general setting and adopt the point of view of change of probability measures. We also make a link with the density approach in the credit risk modelling. In the particular case where no environmental information is concerned, we pay a special attention to the phenomenon of system weakened by failures as in the classical reliability system.