Credit Network

From Open Risk Manual


A Credit Network denotes the mathematical representation of the actual credit relationships within an economy. The purpose of such models is the analysis of the performance of such networks, e.g., for the purposes of Risk Management, Portfolio Management, enforcement of regulations or other business or organizational objectives.

While the mathematical concepts underpinning a credit network can be specified in continuous time (and obviously any economy exists and operates in continuous time), in practice due to tractability issues, most calculations are performed in discrete time. The resolution required depends on the nature of the network and the type of analysis required.

Key abstractions

A credit network framework has the following core components:

  • A discrete temporal grid where future states of the balance sheets / credit asset portfolios are modelled
  • The representation of debtors
  • A representation of contractual asset and liability cashflows
  • Sources of uncertainty that are modelled by a variety of risk models
  • Calculation of asset and liability cashflows conditional on scenarios
  • Aggregate state variables
  • Evolution equations of aggregates