Questions tagged [default-probability]
The default-probability tag has no usage guidance.
2
votes
1answer
86 views
Augmenting Sharpe ratio with ML-calculated default probability
I have access to a very large loan database (>20m rows) where 50% of the loan book are historical loans for which a dummy variable identifies whether the loan defaulted or not. The remaining 50% are '...
1
vote
1answer
71 views
Deriving default probability from CDS spread via stripping
I am currently trying to derive the cumulative probability of default from a CDS spread where the LGD is 30% and there are quarterly premiums including the accrued premium.
...
0
votes
0answers
50 views
Probability of Default from Altman Z-score
I know how to calculate the PD using the Merton Model, Logit or Monte Carlo Simulation, but how do you go about calculating it from Altman's Z-score? I've read somewhere that it can be done by mapping ...
2
votes
3answers
78 views
How to estimate market based PD and LGD for small enterprises?
I am estimating CVA/DVA for derivatives...
How to estimate PD and LGD (or RR) based on market data for the small enterprises, if there is no external rating for them and they don't have bonds or ...
1
vote
1answer
87 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
votes
1answer
46 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
votes
1answer
238 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 ...
-1
votes
0answers
21 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{...
0
votes
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 ...
0
votes
0answers
46 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 ...
1
vote
0answers
63 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
votes
1answer
301 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
votes
1answer
61 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
votes
1answer
40 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 ...
6
votes
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 ...
0
votes
2answers
278 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 ...
0
votes
1answer
662 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 ...
1
vote
0answers
66 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
votes
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
votes
1answer
92 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^{\...
5
votes
1answer
521 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
votes
1answer
58 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....
1
vote
2answers
57 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?
6
votes
0answers
157 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
$$...
0
votes
0answers
353 views
Survival Probability and Hazard Rate Function
I'm currently reading the article written by David X.Li "On Default Correlation: A copula Function Approach". I'm deepening my interest in subprime mortgage crisis.
In the introduction of the paper ...
1
vote
0answers
144 views
Three-state Markov Chain: Credit rating question
Consider a credit-rating system, with two solvency states (A & B) and a default state (D), and assuming recovery rate and interest rate are 0%.
The one year credit spread for an A-rated company ...
1
vote
0answers
293 views
Altman Z-Score model for PD calculation [duplicate]
I am approaching you with one important for me question.
I have a task to calculate probability of default for our clients. I used an Altman Z-Score model to calculate the Z-Scores for each client.
...
3
votes
0answers
137 views
Price of a Bond-Call option in the defaultable framework
I would like to compute the price for a Call option written on a defaultable bond as underlying.
Suppose you have the following dynamic under the risk free measure $\mathcal{Q}$ for the interest rate:
...
0
votes
1answer
361 views
Which interest rate to choose to estimate a CDS default probability?
As you know, with basic assumptions default probability could be calculated by
$$\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
votes
0answers
77 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 ...
1
vote
1answer
161 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.
0
votes
0answers
112 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
vote
1answer
309 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
votes
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
votes
1answer
190 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 ...
1
vote
2answers
75 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 ...
0
votes
2answers
88 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 ...
1
vote
0answers
45 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 ...
1
vote
0answers
49 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 ...
2
votes
1answer
126 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 ...
0
votes
2answers
98 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) ...
5
votes
1answer
4k 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: ...
1
vote
1answer
13k 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
360 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
votes
2answers
493 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 ...
1
vote
0answers
53 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 ...
1
vote
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 ...
2
votes
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.
6
votes
1answer
835 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 ...
2
votes
2answers
637 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 ...
