Reduced-form models of correlated default timing: a systematic literature review

Abstract

PurposeThis paper aims to provide an overview, a classification of existing research groups for correlated default models using a reduced-form method and an identification of future research opportunities in the field.Design/methodology/approachA systematic literature review is used for the identification, selection, evaluation and synthesis of relevant literature using keywords regarding the reduced-form default models in the Web of Science database. The authors also add articles from cross-referencing and expert recommendations to the literature. HistCite™ program is used to generate a citation map of the literature.FindingsThe results show that reduced-form correlated default risk models are developing towards modelling credit risk with both observable and unobservable variables. The frailty correlated default model at the firm level is still a potential research field.Originality/valueThis is the first paper systematically reviewing the research on reduced-form models of default timing.