Questions tagged [default-probability]

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2
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0answers
172 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: ...
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1answer
484 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
106 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
190 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.
2
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4answers
820 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 ...
4
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1answer
4k 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
211 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
81 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
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2answers
104 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
50 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
58 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 ...
3
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1answer
147 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
108 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
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1answer
5k 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
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1answer
16k 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 $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
3
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1answer
667 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
721 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
62 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 ...
2
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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 ...
3
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1answer
4k 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
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1answer
948 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
732 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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0answers
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
77k 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.
3
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2answers
460 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?
5
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0answers
2k views

A model to stochastic hazard rate and CDS spread term structure

I'm interested in the term structure of CDS spread. It's known that the Market CDS rate (fair CDS spread or T-maturity spread) of a CDS contract initiated at $s$, maturity $T$ and recovery function $...
4
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2answers
6k views

CDS Spread and Par Bond Yield Spread

It is claimed that the credit default swap (CDS) spread should approximate the risky par bond yield or coupon rate spread from the riskless bond on the same entity. This comes about when we assume ...
3
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3answers
1k views

Interpolating probabilities of default

I have a table of cumulative probabilities of default of industrial bonds, in time and credit rating. It is similar to S&P whitepaper here. Basically, it looks like this (sample numbers): ...
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2answers
234 views

Probability of Hyperinflation as a function of Probability of Soverign Default

I'm looking for some academic research on modeling risk of hyperinflation. Specifically, I'm interested in modeling the probability of hyperinflation over some time interval (e.g., probability of ...
2
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3answers
3k views

CDS Spreads and Equity Volatility

Why does CDS spreads track the implied volatility on equities? What is the fundamental relationship that would keep the two inline from deviating too far from each other? My speculation: Could it be ...
2
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3answers
3k views

Implied Probability of Default from Bond Prices

I am trying to build out a probability of default model for a bond. Given the current price of a bond and the current risk free rate, I am trying to calculate the probability of default. So assume a ...
8
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2answers
6k views

How to use Merton model to calculate default probability with monthly stock prices?

I want to calculate the estimated default probability with only given data the monthly returns for the last 20 years, the risk-free rate ($R_f$), equity value (EV) and the face value of debt ($D$). My ...

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