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Unformatted text preview: a default? ~definition of default is key- US Jaws are much different from others- What we really care about i510051ng money 2) Defaults are rare events and getting the probability of default correct requires complete data 3) Deciding what sources of information to use is difficult. 4) How to estimate the term structure of default risk can be difficult. Types of Models The types of models that can be applied depends on what you are trying to accomplish 1) Fundamental Models 2) Models using market prices- Structural Models-Rl:c~;c:;el~ Q fis~ I'\i)0.YOv\ \=1) Actual vs. Risk-Neutral Probabilities Rlsk-Neutra! probability of default is NOT the actual probability of default and includes a risk premium. If you develop a term structure of risk-neutral default probabilities for a particUlar issuer, you should be able to price any security. What are you implicitly assuming? What are some problems with this? • • • 2...
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- Fall '11
- Default, credit ratings, credit risk modeling