Measuring Corporate Default Risk

Abstract

This book addresses the empirical estimation of corporate default risk. The book addresses the measurement of corporate default risk based on the empirical estimation of default intensity processes, and their correlation. The default intensity of a borrower is the mean rate of arrival of default, conditional on the available information. For example, a default intensity of 0.1 means an expected arrival rate of one default per ten years, given all current information. Default intensities change with the arrival of new information about the borrower and its economic environment. The main focus here is on methodologies for estimating default intensities and on some key empirical properties of corporate default risk. The book pays special attention to the correlation of default risk across firms, and unobserved “frailty” factors that increase this correlation.

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