Measuring credit risk by using a parameterized model under risk-neutral measure

Su-Lien Lu

Applied Economics Letters, 2013, vol. 20, issue 8, 719-723

Abstract: This article assesses credit risk by using a parameterized model under risk-neutral measure, elaborating the assumption of Byström and Kwon (2007) by using interpolation to estimate the risk-free yield curve. The required data are minimal; the proposed model only necessitates information regarding loans, such as loan rates, and risk-free rates that can avoid shortcomings of rating data. The default probabilities are estimated under risk-neutral measure though few studies have done so. The empirical results show that default probabilities of financial distress are higher compared to those of normal firms. Furthermore, the proposed model is also closely associated with the economic state.

Date: 2013
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DOI: 10.1080/13504851.2012.734593

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