Measuring Actuarial Default Risk. Following P. Jorion,. Financial Risk Management Chapter 19. Daniel HERLEMONT. Measuring Credit Risk. Default risk can be ...
Following P. Jorion, Financial Risk Management Chapter 19
Daniel HERLEMONT
Measuring Credit Risk Default risk can be measured using 2 approaches Actuarial methods measure default rates using historical data
Market price methods infer default risk from market prices of debt, equity prices, credit derivatives derive risk neutral measure of default risk
Actuarial measures of default are provided by external rating agencies Similar techniques can be used to develop internal ratings accounting variables models relates default risk a a list of firm characteristic Daniel HERLEMONT
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Contents
Credit event Recovery rates Application to the construction and rating of collateralized bond obligation Evaluation of corporate and sovereign credit risk Daniel HERLEMONT
Definition of default
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Credit rating "opinion on the future ability, legal obligation and willingnes of a bond issuer to make full and timely payments on principal and interest due to investors" (Moddy's)
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S&P Financial ratios
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Historical default rates (Moody's)
Low probabilities can be very imprecise Daniel HERLEMONT
tance from an investment perspective since corporate debt outstanding in the U.S. ... A number of papers have studied the determinants of corporate yield spreads. .... and credit-default swaps.2 In this paper, we focus exclusively on the latter since
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