Measuring Corporate Default Risk by Darrell Duffie

Measuring Corporate Default Risk

byDarrell Duffie

Hardcover | June 29, 2011

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This book, based on the author's Clarendon Lectures in Finance, examines the empirical behaviour of corporate default risk. A new and unified statistical methodology for default prediction, based on stochastic intensity modeling, is explained and implemented with data on U.S. publiccorporations since 1980. Special attention is given to the measurement of correlation of default risk across firms. The underlying work was developed in a series of collaborations over roughly the past decade with Sanjiv Das, Andreas Eckner, Guillaume Horel, Nikunj Kapadia, Leandro Saita, and KeWang. Where possible, the content based on methodology has been separated from the substantive empirical findings, in order to provide access to the latter for those less focused on the mathematical foundations.A key finding is that corporate defaults are more clustered in time than would be suggested by their exposure to observable common or correlated risk factors. The methodology allows for hidden sources of default correlation, which are particularly important to include when estimating the likelihoodthat a portfolio of corporate loans will suffer large default losses. The data also reveal that a substantial amount of power for predicting the default of a corporation can be obtained from the firm's "distance to default," a volatility-adjusted measure of leverage that is the basis of thetheoretical models of corporate debt pricing of Black, Scholes, and Merton. The findings are particularly relevant in the aftermath of the financial crisis, which revealed a lack of attention to the proper modelling of correlation of default risk across firms.

About The Author

Darrell Duffie has been writing about financial markets since 1984. He is a Fellow of the American Academy of Arts and Sciences, a Fellow and member of the Council of the Econometric Society, and a Research Associate of the National Bureau of Economic Research. He is a member of the Financial Advisory Roundtable of the New York Federa...
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Details & Specs

Title:Measuring Corporate Default RiskFormat:HardcoverDimensions:128 pages, 9.21 × 6.14 × 0.57 inPublished:June 29, 2011Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199279233

ISBN - 13:9780199279234

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Table of Contents

1. Objectives and Scope2. Survival Modeling3. How to Estimate Default Intensity Processes4. The Default Intensities of Public Corporations5. Default Correlation6. Frailty-Induced Correlation7. Empirical Evidence of FrailtyA. Time-Series Parameter EstimatesB. Residual Gaussian Copula CorrelationC. Additional Tests for Mis-Specified IntensitiesD. Applying the Gibbs Sampler with FrailtyE. Testing for FrailtyF. Unobserved HeterogeneityG. Non-Linearity CheckH. Bayesian Frailty DynamicsI. Risk-Neutral Default Probabilities