A Markovian Model for Default Risk in a Network of Sectors

In this paper, we study the problem of modeling the dependence of defaults in different sectors. We consider multiple default data sequences as a network and model them by using a Markov chain model. The new network model allows us to compute two important risk measures, namely, value-at-risk (VaR) and expected shortfall (ES). Numerical experiments are given to illustrate the practical implementation of the model. We also perform empirical studies of the model using real default data sequences and analyze the empirical behaviors of the risk measures arising from the model.