Eur. Phys. J. B 71, 461-466 (2009)
https://doi.org/10.1140/epjb/e2009-00322-1

Collective firm bankruptcies and phase transition in rating dynamics

Faculty of Physics, Center of Excellence for Complex Systems Research, Warsaw University of Technology, Koszykowa 75, 00-662 Warsaw, Poland

Corresponding authors: ^a psieczka@if.pw.edu.pl - ^b jholyst@if.pw.edu.pl

Received: 26 November 2008
Revised: 7 July 2009
Published online: 26 September 2009

Abstract

We present a simple model of firm rating evolution. We consider two sources of defaults: individual dynamics of economic development and Potts-like interactions between firms. We show that such a defined model leads to phase transition, which results in collective defaults. The existence of the collective phase depends on the mean interaction strength. For small interaction strength parameters, there are many independent bankruptcies of individual companies. For large parameters, there are giant collective defaults of firm clusters. In the case when the individual firm dynamics favors dumping of rating changes, there is an optimal strength of the firm's interactions from the systemic risk point of view.