Contagion or Macroeconomic Fluctuations? Identifiability in Aggregated Default Data

Paper: arXiv 2604.18118

Authors: Shintaro Mori

Abstract

Can contagion be inferred from aggregated default data? We study this as a problem of identifiability, asking whether contagion generates components in default count distributions that remain distinct from those induced by macroeconomic fluctuations. We compare three dependence structures: cumulative contagion in the Lo-Davis model, threshold-type contagion in the Torri model, and common-factor dependence in the Vasicek model. Under an i.i.d. specification, the Vasicek model provides the best overall fit, especially in the tail, indicating that a smooth mixture structure captures annual default clustering more effectively than threshold-type contagion at the aggregate level. We then allow the default probability to vary across years through a hierarchical specification. Under this extension, most of the variation in annual default counts is explained by cross-year movements in default conditions rather than by within-year contagion. What remains, however, depends on the interaction mechanism. In the Torri model, threshold-type contagion does not leave a stable component that can be separated from macroeconomic heterogeneity after aggregation. In the Lo-Davis model, by contrast, a small but persistent component remains visible in both the variance decomposition and the tail behavior. These results clarify when contagion can still be inferred from coarse-grained data and when it is effectively absorbed into macroeconomic variation.

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a rigorous mathematical framework to solve an important identifiability problem in credit risk, comparing distinct interaction mechanisms (Vasicek, Lo-Davis, Torri). Its empirical and statistical testing on aggregated default data clearly demonstrates when contagion effects can vs. cannot be disentangled from macroeconomic fluctuations.

Research Flowchart

  flowchart TD
    A[Research Goal: Infer Contagion vs. Macroeconomic Fluctuations in Aggregated Default Data] --> B[Input Data: Aggregate Annual Default Counts]
    B --> C[Compare Models & Mechanisms: Vasicek Common-Factor vs. Lo-Davis Cumulative Contagion vs. Torri Threshold Contagion]
    C --> D[Evaluate Specifications: i.i.d. Mixture vs. Hierarchical Cross-Year Default Probability]
    D --> E[Outcome 1: i.i.d. Vasicek Model Fits Tail Best, Outperforming Threshold Contagion]
    D --> F[Outcome 2: Hierarchical Macro Shifts Explain Most Default Variation]
    F --> G[Outcome 3: Torri Contagion Absorbed by Macro Variation; Lo-Davis Contagion Leaves Small Persistent Signal]

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0 of 39 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.