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That means that for any issuer a there exists a return

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Unformatted text preview: any capital is 0.002- - - very small! •  The probability that the senior tranche is completely wiped out is 0.110 = 0.0000000001- - - extremely small! Perfectly dependent defaults •  If defaults are perfectly dependent, the probability of k=4 or fewer defaults is the same as the probability of one default, 0.1. •  The probability that the senior tranche is wiped out is 0.1- - - huge! Using historical data is problema:c •  Not enough data to es:mate default correla:ons •  E.g., in order to es:mate joint default probability for two companies’ bonds, need some joint defaults in historical data. Asset correla:on approach •  Gupton, Finger, and Bha:a. “CreditMetrics- - - Technical Document”, Chapter 8, 1997. •  Suppose the value of bond issuer’s assets determines its...
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