Default Risk

Damir Filipović ()
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Damir Filipović: University of Vienna, and Vienna University of Economics and Business

Chapter Chapter 12 in Term-Structure Models, 2009, pp 225-243 from Springer

Abstract: Abstract So far bond price processes P(t,T) had the property that P(T,T)=1. That is, the payoff was certain, there was no risk of default of the issuer. This may be the case for treasury bonds. Corporate bonds, however, may bear a substantial risk of default. Investors should be adequately compensated by a risk premium, which is reflected by a higher yield on the bond. In this chapter, we will briefly review the two most common approaches to credit risk modeling: the structural and the intensity-based approach. The structural approach models the value of a firm’s assets. Default is when this value hits a certain lower bound. This approach goes back to Merton’s (J. Finance 29(2):449–470, 1974) seminal corporate debt model. In the intensity-based approach, default is specified exogenously by a stopping time with given intensity process. This approach can be traced back to work of Jarrow, Lando and Turnbull in the early 1990s.

Keywords: Credit Risk; Default Risk; Default Probability; Corporate Bond; Bond Price (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1007/978-3-540-68015-4_12

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