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I'm trying to implement CreditGrade in python, from the msci Technical Notes (https://www.msci.com/documents/10199/dd31bcce-6fe3-47b7-9fb7-10c4c8f750ba) but I'm running into some comprehension trouble (if it's too much of a basic problem, I'll repost in SE's Personal Finance).

The asset volatility is given by : sigma = sigma_star * (price_star / (price_star + LD) )

I'm understanding that the sigma_star and price_star are there to keep volatility more stable over time, but I'm not sure to understand how to compute them (the point 3.1 in original Tech Notes) at time t:

  • is sigma_star only the standard deviation of the last 1000 day's returns ?
  • What about the price_star therefore ? Is it the share price at t (and S_0 is therefore the price at the beginning of the 5-y CDS-quote, as in 3.1) ?

Thank you, again sorry if it's supposed to be basic knowledge, I'll move it if necessary.

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