Ventana software support forum

Posted: **Sun Apr 28, 2002 3:27 pm**

Dear all,
I would like to ask you some information and suggestion about the way to
approach the problem of credit defaut risk in a system dynamics
perspective. In particular, I would like to know if and in which way
this kind of problem has been already considered in system dynamics.
I am studing this problem from a mathematical point of view but now I
would like tostudy the default credit risk problem from a dynamic point
of view and come out with a model to address its valuation problem.
Every suggestion and information will be welcome.
Thanks to you all

Davide
From: Davide Provenzano <sd125@ifi.uib.no>

Posted: **Mon Apr 29, 2002 3:19 pm**

Hi Davide!
We have done some works with risk in trading electricity, usind SD. But
we were interested in price risk managment. I know that it is completly
different, however, maybe it sould give you some ideas:
I will try to summarize the porpective:

Imaging that you are a trader of electricity. You have the posibility
to buy and sell electricity in a market. LEts see only the case to
buy. Tou can buy either using long term contracts or in the pool
price. Supose that you have higher expected return if you go to the
pool, but you have higher risk. What we have is a microworld with the
market, in this, we incluede the following tools which help you to
analyse the risk postition:

1. Estimation of the Risk (price variance, or standar desviation, or
volatility): two models. The user can analyse and undestand these
concepts and also the models. One is the famus CAPM (Capital Assetment
Pricing Model) and the traditional way using the data (prices) of the model.
2. With the expected return (wiht any of the models before), and the
variability (risk) you can build the optimal portfolio to buy
electricity according to the portfolio theory (Markovic...I dont
remember exatly the name)
3. Once you have the portfolio you can estimate some "indicators of
risk": VaR (Value at Risk), PaR (Profit at Risk).

Look that you can use all that thing in any time of the simulation.

I do not remember excatly about your problem, but if you send me the
presentation I try to give some comments
Santiago

From: Santiago Arango <santiago.arango@ifi.uib.no>

Posted: **Thu May 30, 2002 4:05 pm**

You may want to look at the system dynamics bibliography, it has over 6,000
citations for information on credit risk. I performed a quick search using
the term ³credit risk² and came up empty, but a search with the word
³finance² resulted in many hits. The bibliography is shareware that can be
downloaded from the System dynamics Society web cite located at
http://www.systemdynamics.org. Look under member services.

As part of my Ph.D. thesis I developed a highly aggregated system dynamics
model of a single commercial bank that exhibited principal-agent and moral
hazard problems. Buried in there is some model structure and text that
deals with credit risk. It would take to long to describe what I did in
this note. In addition, in reviewing the banking and finance literature I
came upon a finance economist who had focused on bank prudence. He wrote
the books listed below. I found these books useful and feel that this
fellow was a systems thinker. He provides verbal descriptions, but the
circular causality of the problems he discusses are clearly evident. As I
recall, he discusses credit risk from the perspective of bank prudence.

I have not put my dissertation or the model on the web, but if you wish I
could send you an electronic copy. Contact me directly and let me know.

The citations I spoke of are:

Taylor, J. F. (1989). The Banking System In Troubled Times. New York, Quorum
Books.
Taylor, J. F. (1990). The Process of Change in American Banking. New York,
Quorum Books.
Taylor, J. F. (1994). The Prudent Management of Modern U.S. Banks:
Redefining Responsibility. Westport, Quorum Books.

Rod MacDonald
Albany, New York
Rod@isdps.org

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