Distance to Default and Credit Valuation Adjustment

David Lee
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David Lee: BMO

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Abstract: Distance to default is an essential measure of credit risk and is widely used for determining default risk, rating migration, and rating risk. This paper presents a new approach to model credit risk via distance to default. The model provides an integrated view of credit valuation adjustment by linking distance-todefault, default probability, survival probability, default correlation, and risky valuation together. The numerical study shows that the model results are very close to the market observations, indicating that the model is quite accurate. The numerical results corroborate the theoretical prediction on credit spreads and default correlations.

Keywords: credit value adjustment (CVA) credit risk modeling distance to default default probability survival probability asset pricing involving credit risk JEL Classification: E44 G21 G12 G24 G32 G33 G18 G28; credit value adjustment (CVA); credit risk modeling; distance to default; default probability; survival probability; asset pricing involving credit risk JEL Classification: E44; G21; G12; G24; G32; G33; G18; G28 (search for similar items in EconPapers)
Date: 2023-09-15
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