16 votes

How to compute the implied probability of default from a CDS spread?

Risk-neutral default probability implied from CDS is approximately $P=1-e^\frac{-S * t}{1-R}$, where $S$ is the flat CDS spread and $R$ is the recovery rate. The CDS Spread can be solved using the ...
Chase van der Rhoer's user avatar
15 votes

How to compute the implied probability of default from a CDS spread?

I believe the answer can be further improved for all those being directed here by google after 3 years. A common way to model the default probability is by the hazard rate. As @Bob correctly mentions, ...
Diego F Medina's user avatar
10 votes
Accepted

Interest rate implied probability of default

You can use the "credit triangle" which states that the (annualised) credit spread $S$ equals the annualised probability of default $p$ times the loss given default LGD which equals par minus the ...
Dom's user avatar
  • 2,147
8 votes
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Recovery Rates in CDS valuation

Apparently, you refer to this passage from Prof John C. Hull (11th edition, 2021): It's confusing because Hull is referring to the market conventions before the "Big Bang". This is no ...
Dimitri Vulis's user avatar
5 votes

CVA - Where does the default probability (PD) come from?

"Debt issuer default risk" and "counterparty risk" are very similar. From Risk magazine: Counterparty Risk The risk that a counterparty to a transaction or contract will default (...
Daneel Olivaw's user avatar
5 votes
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Debt seniority and probability of default

A CDS contract has a "reference entity" (obligor, bond issuer) and a "reference obligation" (the specific bond that needs to default, rather than a tier). Read https://www.isda.org/...
Dimitri Vulis's user avatar
4 votes
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Reproduce CDS Index Default Probability via Tranche [0,100] Probability

It is actually that you forgot your $1 - R$ in formula (2) :) The index survival curve is defined similarly to the tranche's : $Q\left(t\right) = 1 - \mathbb{E} \left[L\left(t\right)\right] = 1 - \...
siou0107's user avatar
  • 2,680
4 votes
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Estimation of Default Probability using Merton's model

As you see in the third equation on that Mathworks page, the Merton model postulates that the value of equity equals the value on a residual claim on a company's assets after the creditor has been ...
Kermittfrog's user avatar
  • 6,554
4 votes

Survival probabilities starting from CDS spreads

OK, here is a simplified demonstration: Before we consider swaps, let us consider very simple bonds. Suppose that you have a choice of two zero-coupon bonds. A riskless one costs 95 and is certain to ...
Dimitri Vulis's user avatar
4 votes

Quarterly Survival rate given there is a Quarterly Probability of Default

It helps to get some intuition on all the terms. Point-in-Time (PiT) Probability of Default (PD) is a probability that the counterparty will default in a specific time-interval. I will denote the ...
Jan Stuller's user avatar
  • 6,098
3 votes
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Conversion between physical and risk-neutral default probabilities

I'm no expert on this topic but here's my two cents. Hopefully if I'm wrong someone will correct me. From the 2 relations you wrote, we see that $$ DD_q = -N^{-1}(P) - \lambda R \sqrt{T} $$ or ...
Quantuple's user avatar
  • 14.6k
3 votes

PD and LGD for ECL calculations needs to be time dependent?

I assume that you calculate ECL in the context of IFRS9 -correct? market practice often follows the following approach: estimate a TTC PD/LGD (TTC = through the cycle). This corresponds to your ...
Richi Wa's user avatar
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3 votes

Bond prices and probability of default

Let's start with the "safest" bonds in the world, and work our way down the credit quality curve. In Europe, the safest and virtually "credit-risk free" bonds are the German Bunds. ...
Jan Stuller's user avatar
  • 6,098
3 votes

Beginner's resources on copulas and impact of correlation on loan defaults?

At the risk of arming you to create the next quant-apocalypse... The statement that the expected loss does not depend on correlation is typically the result of modelling a portfolio as a sum of ...
mike's user avatar
  • 31
3 votes

Quarterly Survival rate given there is a Quarterly Probability of Default

Just to add to the above answer, if $\tau$ is the default time of an entity, we have $$P(\tau>t-1) =: SP_{t-1}$$ as the definition of survival probability beyond time $t-1$ (where $t$ and $t-1$ are ...
ir7's user avatar
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3 votes
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Assessing Credit Rating Agencies

There are many papers. Here are some random examples: Many of the papers under https://www.michaeljacobsjr.com/research-papers/ http://dx.doi.org/10.2139/ssrn.1466710 Ralf Elsas, Sabine Mielert. ...
Dimitri Vulis's user avatar
2 votes

Girsanov theorem and default rates in bond credit rating

Suppose I give you objective probabilities $\mathbb{P}(S_T \geq K)$ of an equity finishing above a certain level $K$ at a future time $T$ (or in your case a survival probability in the form of default ...
Quantuple's user avatar
  • 14.6k
2 votes
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LGD/PD Databases

Re LGD: you can look at Mark-iT for ISDA Credit Event Auction settlements, here's a link actually http://www.creditfixings.com/CreditEventAuctions/fixings.jsp Obviously these will give recoveries as ...
Mehness's user avatar
  • 533
2 votes
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What relevance might the Modigliani-Miller theorem have for weight of evidence?

I understand your question to be, "Does the Modigliani-Miller theorem have any relevance for forecasting the probability of default based upon debt to equity ratios?" Not really. The Modigliani-...
Matthew Gunn's user avatar
  • 6,934
2 votes

Is it possible to sell protection on own asset with CDS?

First, I would emphasize that default protection is bought and sold on debt securities , not on assets. To answer your question, you cannot sell protection on your own debt. You can sell protection ...
dm63's user avatar
  • 17k
2 votes

Objective measure of highly leveraged firms using Debt-to-EBITDA ratio

It is mainly subjective, depends on country and sector. E.g. when I worked in private equity in a distressed fund a highly levered company was a company with a net-debt to EBITDA ratio > 7.0. Those ...
phdstudent's user avatar
  • 8,306
2 votes
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Probability of default: issuer vs volume weighted

If there are 10 issuers and one defaults this year, the issuer weighted probability of default is 0.1. But if the one issuer that defaults is one with a larger than average amount of debt outstanding,...
nbbo2's user avatar
  • 11.2k
2 votes

PD and LGD for ECL calculations needs to be time dependent?

You are building a model - the question you are asking is a trade off between accuracy and complexity. If the accuracy only improves in a minor capacity and the extension is considered complex you ...
Attack68's user avatar
  • 10.2k
2 votes

CreditRisk+ spreadsheet implementation

you can try this on waybackmachine: https://web.archive.org/web/20000817021426/http://www.csfb.com/creditrisk/
student's user avatar
  • 21
2 votes
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Use of PIT vs TTC PD in a Merton one-factor model

The first equation is already a PIT PD if $\displaystyle PD_{i}$ is substituted by TTC PD. The challenges of using this model are: (1) $\displaystyle \rho _{i}$, the asset correlation, is very ...
nyk's user avatar
  • 256
2 votes

Bond prices and probability of default

what happens if such probability differs from those implied by CDS spreads? I would imagine there is an arbitrage opportunity there but don’t know what it would look like in practice Bonds vs. CDS is ...
user42108's user avatar
  • 2,252
2 votes

Generalized Linear Mixed Model (GLMM) for the probability of default of corporates

Merton models and their progeny are likely the route you want to take. There's a ton of research out there on this, model selection largely depends on the use for your product (eg, loan or firm risk ...
Kch's user avatar
  • 981
2 votes
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Square root specification of parameters in factor models

The main motivation for the use of Vasicek single factor framework, is that the model produce analytically tractable formulas that are easy to implement and does not require any extensive numerical ...
Pleb's user avatar
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