Research On The Impact Of Credit Risk Mitigation On Financial Risk Contagion

The Credit-Risk-Mitigation is a kind of derivatives in China which includes four kinds of credit derivatives.Similar derivatives are widely used abroad.On September 23,2016,the China Association of Interbank Dealers issued the “Pilot Business Rules for Interbank Market Credit Risk Mitigation Tools”.Based on the two credit derivatives CRMW and CRMA issued in 2010,two additional supplements were made.CDS and CLN have been issued.So far,there are four major credit derivatives tools in China,which are collectively referred to as credit risk mitigation tools CRM.At present,most of the research on China's credit risk mitigation tools still stays in theoretical analysis and case analysis.There are few studies that combine it with the model;therefore,it is important to research on the China's credit risk mitigation tools,and strict regulatory framework should be established.This paper created a credit risk contagion model by combining multi-agent model,infectious disease model and theory of CRM transaction.The model consists of three parts: agent classification,agent states transitions and the index of credit risk assessment construction.The agent classification combines the framework of the classic infectious disease model,and divides the states of agents into four kinds.There are five situations in the agent states transitions,four of which follow the state transition parameters in the infectious disease model;for situation,we created an asset level indicator i,tW on the agent and uses it as a state transition threshold.The index of credit risk assessment construction includes the evaluation of the instantaneous risk level of the system at the initial moment,and the evaluation of the stable risk level at the final moment of the system.It is used to study the final evolution of the financial system risk level under different initial risk levels.To realize the model should brings the results of the three parts above together,completes the model initialization and the construction of the main transaction partnership.Finally,this paper collects the credit risk mitigation tool transaction data,provides a reference range for the model parameters,and simulates the model under different initial risk levels,and provides suggestions for effectively controlling the financial system credit risk contagion.The study found that: the credit risk contagion model can simulate the evolution of credit risk in the financial system.If the initial financial system is at low risk level,the credit risk mitigation tool can effectively help the financial market to spread the credit risk;as the overall default rate of the financial system increases,the credit risk mitigation tool will increase the possibility of the collapse of the entire financial system.There are two innovations in this paper: First,a credit risk contagion model is proposed,which can dynamically display the evolution process of institutional trust status in the financial system,considering not only individual institutional factors,but also interinstitutional interactions.The second is to apply the infectious-disease model to the credit risk contagion problem,and expand the classification of agents in the traditional infectious-disease model to two dimensions,and constructs a state transition threshold to optimize the agent state transition rules.The shortcoming is that the selection of indicators for the model needs to be further improved,and the verification of the model needs to be further expanded.