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7 votes

Martingale measure and replicating portfolio in Risk Neutral Pricing of Defaultable Zero-Coupon Bonds

The risk-neutral probability measure is defined in terms of its numeraire. For the usual risk-neutral probability measure the numeraire is the bank account, $\beta(t)$. If we have a tradeable asset $X(...
mmencke's user avatar
  • 845
6 votes

Why investment grade floor is set at Baa3/BBB-?

The differences in credit risk between Moody's Baa2 versus Baa3 versus Ba1 versus Ba2 are all comparable. People would pay much less attention to agency ratings had the regulators not forced them to. ...
Dimitri Vulis's user avatar
5 votes
Accepted

Annualized actual probability

Yes your formula seems correct under the simplifying assumptions as you can easily verify: Assume annual default rate is d, and the portfolio size is N. In the first year, we will have Nd defaults. ...
Magic is in the chain's user avatar
4 votes
Accepted

forward contract on a defaultable zero-coupon bond

Based on notations in this question, assuming the market value recovery mechanism, the pre-default value at time $T_1$ of a zero-coupon bond with maturity $T_2$, where $T_1 < T_2$, is given by \...
Gordon's user avatar
  • 21.1k
4 votes

Why investment grade floor is set at Baa3/BBB-?

Yeah, default rate jumps considerably. For example in following, mid value of default rate jumps from 1% to 7.5 % : "COMMISSION IMPLEMENTING REGULATION (EU) 2016/1799 of 7 October 2016 laying ...
Deno's user avatar
  • 41
3 votes
Accepted

Why investment grade floor is set at Baa3/BBB-?

Cumulative default and transition rates for s&p credit ratings can be found here: https://www.spglobal.com/ratings/en/research/articles/210407-default-transition-and-recovery-2020-annual-global-...
AlRacoon's user avatar
  • 6,612
2 votes
Accepted

Definition of continuously compounded yield for perpetual defaultable coupon bond

You could equate the value function with an infinite series of discounted cash flows, discounted at the yield. Assuming a continuous coupon rate and a continuous yield $r^d$: $$ r^d:P(V) \stackrel{!}{=...
Kermittfrog's user avatar
  • 6,663
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
  • 17.1k
2 votes

CDS Vs Credit Risk premium over risk free

In theory, it should indeed be equal as holding a bond $B_t$ from some company $X$ as well as paying on a CDS written on the bond should earn you the risk-free rate, given the CDS hedges the default ...
Daneel Olivaw's user avatar
2 votes

Can CreditGrades CDS Pricing Model be used for financial firms?

(Although the question was asked long time ago it may be of help for others as well) You may want to have a look at Nagel and Purnanandam (2015) Bank Risk Dynamics and Distance to Default (https://...
e.mal's user avatar
  • 61
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
  • 8,371
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
1 vote
Accepted

Does Gordy Formula measure default risk & downgrade risk?

The model (and models like it) seem to suggest an issuer or entity is, by time $T>0$, in one of two states: defaulted or not. Money is lost only on a default.
TickaJules's user avatar
1 vote

Strange calculation for Credit risk

The $TP_{T,2,1} \times \left(TP_{T,1,3} - TP_{T_1,1,3}\right) + TP_{T,2,2} \times \left(TP_{T,2,3} - TP_{T_1,2,3}\right)$ term is clearly supposed to correspond to PD, but its actual meaning is ...
Adam N.'s user avatar
  • 233
1 vote

Factors impacting default risk

While not directly carbon footprint but environmental performance: Bauer & Hann (2010) Corporate environmental management and credit risk Findings: Environmental concerns are associated with a ...
Felix's user avatar
  • 206
1 vote

Where can I find recent tables with the average cumulative default rates?

I also had this problem, because the available annual default studies did not have these information (to the best of my knowledge). Cumulative default rates can be found in the series Semi-Annual ...
alexbougias's user avatar
  • 1,416
1 vote

Calculating the long run average default rate when the portfolio changes during the year

I don't know the answer to this and am responding purely out of interest and idea sharing, since I like the question. Could this work as a Parametric intensive computational statistical approach; 1) ...
Attack68's user avatar
  • 10.5k
1 vote
Accepted

From quoted spread and coupon to upfront, and vice versa : which recovery rates and when?

I was indeed wrong : only the assumed recovery rate is used. This is for instance confirmed by the QCDS Bloomberg screen that shows only one recovery rate to do the (quoted spread,coupon) --> upfront ...
Olórin's user avatar
  • 1,223

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