Questions tagged [default-probability]
The default-probability tag has no usage guidance.
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1answer
55 views
Probability of default: issuer vs volume weighted
Some probability of default are issuer-weighted and some are volume-weighted. I don't understand what this means. I had a look into Moody's documentation available here:
https://www.moodys.com/sites/...
2
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1answer
42 views
Forecasting default rates using a macroeconomic model
I am trying to forecast corporate default rates using macroeconomic data. I have a few explanatory variables (all the variables are explained in figure 2), which range from 2000 to 2017. On this ...
3
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1answer
158 views
CVA - Where does the default probability (PD) come from?
Some authors use CDS from the market to derive the implied default probability (from a risk-neutral point of view).
I wonder: how exactly does a CDS reflect counterparty risk?
Let me put an ...
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0answers
20 views
cumulated intensity of jump time
1.I found some books define jump time or first arriving time $\tau$ of 'Poisson process' by
$$\Lambda(\tau)=: \xi\sim\textrm{...
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0answers
42 views
Debt per share in CreditGrades model
In order to specify the debt per share in the CreditGrades model one has to specify the liabilities to be included from the firm's balance sheet.
I do not have access to the technical document ...
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0answers
44 views
Jump diffusion model and Firm probability of default
I want to examine whether corporate events affect firm's probability of default. My initial thought was a jump diffusion model, although in the literature, the only work I found, involved CDS market ...
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0answers
68 views
Why floor marginal PDs?
At a client site (insurance Co) I noticed that they took Moody's Default history. Calculated marginal PD by rating and Time. Floored the Marginal and then converted back to Cumulative. Why floors the ...
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0answers
59 views
How to determine the default probability of a county in a bond that is not in its native currency?
Disclaimer: This post is cross posted in here also.
Consider the following case:
Country P uses the currency Euro and gives p percent interest on a one year bond issued in Euro.
Country Q uses the ...
2
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1answer
230 views
credit risk - marginal default probability
I have been working on an assignment trying to calculate marginal/conditional probability of default. Using a logistic regression framework, I was able to compute the 12-month unconditional PD for ...
2
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1answer
52 views
Objective measure of highly leveraged firms using Debt-to-EBITDA ratio
I am looking for some kind of guidance what is generally considered a high or low ratio of Debt-to-Earnings before interest, tax, depreciations and amortisations (EBITDA). In a recent article by The ...
0
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1answer
38 views
Heuristic (or algorithm) for calculating a risk premium, given a probability of default and a “minimum” profit margin (expressed as a yield)
Assuming that I have means of determining and calculating the following metrics:
Risk (i.e. probability*) of a default to a particular borrower as P
Profit margin of X%
The profit margin is taken to ...
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0answers
48 views
Quantitative and regulatory aspects of portfolio integration in IRB credit portfolios
Say bank A buys a credit portfolio "B" (e.g. corporate loans or retail mortgage, ...) from bank B.
Bank A fulfills the the requirements of CRR (capital requirement regulation) for its existing ...
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2answers
254 views
Merton model for Probability of Default - What liabilities?
In Merton structural model for credit risk (74), the company's Assets and Liabilities are used to imply the default probability of the firm.
At the end, we don't need to know the assets value, and ...
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1answer
509 views
From quoted spread and coupon to ufront, and inversely : which recovery rates and when?
Echoing the following question :
Markit recovery rates : assumed vs real
I would like to have a confirmation on my understanding on the matter.
Markit provides data for CDS, namely, for tenors ...
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0answers
59 views
PD validation in the low/no default setting
The topic of this question is the validation as prescribed in the Basel N ($N \ge 2$) framework. The task is given the probability of default $p_k$ for $K$ rating classes at time $t$ and the outcome ...
3
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1answer
109 views
Is it possible to sell protection on own asset with CDS?
Is it possible for a company to sell protection on their own assets or own country bonds by CDS?
The company can buy protection on those assets, but how about selling?
I suppose it can not sell. Is ...
3
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1answer
88 views
Simplifying an expectation function of default time and rates
I have the following expectation to calculate :
$$ \mathbf{E}\left[ e^{\int_{t_0}^{\tau} r_s ds} \mathbf{1}_{\{\tau < T\}}\right] $$
More precisely, I want to show that :
$$ \mathbf{E}\left[ e^{\...
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1answer
449 views
Conversion between physical and risk-neutral default probabilities
In the simple Merton structural credit risk model, the physical default probability is given by:
$$
DD_p = \frac{\ln(A / D) + (\mu -0.5\sigma^2)T}{\sigma \sqrt{T}}
$$
$$
P=N(-DD_p)
$$
Assuming that ...
0
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1answer
55 views
What relevance might the Modigliani-Miller theorem have for weight of evidence?
Suppose in computing weight of evidence based on financial ratios of some bank, one finds that their debt ratio and equity ratio have largely (you pick how large I guess) differing weights of evidence....
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2answers
56 views
Problem of PD estimation [closed]
Why is small number of defaults is a problem in case of PD estimation? What are the consequences? Can you recommend notes, books, etc about the topic?
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0answers
155 views
What is the probability of ruin of a Geometric Ornstein-Uhlenbeck process?
I would like to calculate the probability of ruin (or, default), i.e.
$$\text{Pr}(\tau<T),$$
where $\tau$ is the default time and $X_t$ follows the Geometric Ornstein-Uhlenbeck (O-U) process
$$...
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0answers
292 views
Survival Probability and Hazard Rate Function
I'm currently reading the article written by David X.Li "On Default Correlation: A copula Function Approach". I'm deepening my interest in subprime mortgage crisis.
In the introduction of the paper ...
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0answers
124 views
Three-state Markov Chain: Credit rating question
Consider a credit-rating system, with two solvency states (A & B) and a default state (D), and assuming recovery rate and interest rate are 0%.
The one year credit spread for an A-rated company ...
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0answers
256 views
Altman Z-Score model for PD calculation [duplicate]
I am approaching you with one important for me question.
I have a task to calculate probability of default for our clients. I used an Altman Z-Score model to calculate the Z-Scores for each client.
...
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0answers
130 views
Price of a Bond-Call option in the defaultable framework
I would like to compute the price for a Call option written on a defaultable bond as underlying.
Suppose you have the following dynamic under the risk free measure $\mathcal{Q}$ for the interest rate:
...
0
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1answer
335 views
Which interest rate to choose to estimate a CDS default probability?
As you know, with basic assumptions default probability could be calculated by
$$\text{CDS Spread} = p \cdot \frac{1-RR}{1+r}$$
Does that make sense to use 5 Year CDS Spread with 5 year Generic ...
2
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0answers
71 views
Portfolio diversification on default risk
A portfolio of 13 different companies have loans. Company $i$ default on their loan with probability $p_i$ and survive with prob $q_i=1-p_i$. Let $Y_i=1$ denote default. Question: How could I get to a ...
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1answer
155 views
LGD/PD Databases
I am trying to compare LGD/PD for Banks and other financial institutions using different approach thank Merton. Are there any publicly available data on which I can build?
Thanks.
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90 views
How cyclical should a rating system be and why?
I am reading about different approaches for building a rating system and came across the terms Through-the-Cycle (TTC) and Point-in-Time (PIT). They are both extreme cases of whether a rating system ...
1
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1answer
266 views
Is exposure at default the same thing as the limit amount on a loan?
In Credit Risk terminology, is the Exposure at Default(EAD) the same thing as the total Credit LIMIT amount on the Loan? Because if Bank gives a loan with a limit of 10,000$ and the borrower has a ...
3
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1answer
2k views
Interest rate implied probability of default
Is there an equation or rule of thumb to determine the probility of default for a loan with a specific interest rate?
Let's say, a bank offers a company a loan with an interest rate of 6%, by which ...
2
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1answer
179 views
Girsanov theorem and default rates in bond credit rating
Default rates are kind of probabilities, right?
Is it possible to use the Girsanov theorem in that context? For example if we have a table of real world probabilities, could we use the Girsanov ...
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2answers
72 views
How exactly are correlated defaults used/analyzed?
I've read a lot about correlate defaults but I can't seem to understand how they're used practically in a portfolio theory setting. Suppose I have two (?) companies, X and Y, and historic default ...
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2answers
86 views
What is the probability of defaulting in year 2?
I was asked this question the other day, but it's been years since I've done this work.
If the probability of a company to default in a year is $8\%$, what is the probability that it will default in ...
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0answers
44 views
Using Put Volatilities to Estimate Firm Leverage/Credit Risk
This paper by Hull, Nelken and White uses implied volatilities in structural credit risk models to back out a market-implied leverage ratio. CreditGrades has a similar implementation using equity ...
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0answers
45 views
Valuation Models for Bank Credit Default
What approaches exist for calculating a fair price for a credit default swap for a bank? Most of the traditional valuation models are geared towards industrial firms. Are there any theoretical ...
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1answer
124 views
Pricing homogeneous Basket Default Swap
Consider a basket with $K=10$ names. Default times of the names,
$\tau_k$, are i.i.d. random variables with distribution $P(\tau_k \leq
t) = 1 - e^{-\lambda t}$. Suppose that each name in the basket ...
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2answers
92 views
Business cycles and missing data
For many probability of defaults models in credit risk it is needed to use data observed from a "full" business cycles. Usually a business cycle is defined as a recurring (not necessarily periodic) ...
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1answer
3k views
Is marginal probability of default the same as conditional probability of default?
I'm thrown off by the term marginal probability of default. I've seen it defined by some authors as synonymous term for conditional probability of default
conditional probability of default: ...
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1answer
12k views
Cumulative vs marginal probability of default
I understood the cumulative (aka unconditional) probability of default to be the probability of defaulting in a given period eg: between years 1 and 5. Further $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
2
votes
1answer
295 views
Calculating probability of default with no recovery
Given two methods to calculate the 1 year conditional probability of default of a zero coupon bond, I've come up with slightly different but close results.
From my approaches below, is it reasonable ...
3
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2answers
459 views
Extracting Default probability from a single CDS
I have to find the CDS's default probability using the simplest Poisson Process (intensity constant).
I'm wondering how to get this estimate if I have only a CDS with maturity 5years.
If I had ...
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0answers
50 views
Alternatives to CDSs for default term structure?
The CDS market seems to be drying up, funding&liquidity issues are now prevalent over credit, so other sources for default probabilities are needed.
What else is commonly used to obtain a ...
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1answer
2k views
Actually benefiting from logistic regression to estimate probability of default
Does anyone know any events where using logistic regression to estimate probability of default has led to a bank, financial institution, government or anything really to benefit in practice?
I see a ...
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1answer
3k views
What is Margin of Conservatism
In modelling loss given default,(LGD), we often encounter the term Margin of Conservatism.
What is it in layman's terms? I am not able to find a wikipedia page on this.
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1answer
802 views
Term structure of default probabilities without market data
With the forthcoming new regulations, IFRS9, financial institutions will be required to model life time expected credit losses. Consequently, it is necessary to model the term structure of default ...
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2answers
595 views
Using Financial Ratios to get credit rating or PD
Hello I'm looking for papers, aside from ones that use CDS spreads, about credit rating development or estimating default probability based on financial ratios that also include methodology and maybe ...
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1k views
How to calculate Probability of Default from Survival Probability
I would calculate Probability of Default from Survival Probability. I want to know how they are related.
This is how I think they are related:
...
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4answers
49k views
How to compute the implied probability of default from a CDS spread?
I have two tasks:
Given country's CDS spread draw implied probability of default.
Given probability of default calculate CDS spread.
If possible, refer to any papers.
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2answers
384 views
Deriving credit spreads or migration matrices from prob of default
How do I derive credit migration/transition matrices or spreads from default probability? May you please provide references, or do you know what type of articles or authors to find?
