We provide maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For U.S. Industrial firms, based on over 390,000 firm-months of data spanning 1979 to 2004, the level and shape of the estimated term structure of conditional future default probabilities depends on a firm’s dist...

Credit default swaps (CDSs) are thought to ease borrowing by protecting lenders against default. This paper develops a model of the demand for CDS when borrowers choose the riskiness of investment and verification is imperfect. The model shows that CDSs may lead to risk-shifting, increasing the probability of default. Our model provides new insights on the role of CDS during the recent financia...

The credit derivatives market has experienced remarkable growth over the past decade. As such, there is a growing interest in tools for pricing of the most prominent credit derivative, the credit default swap (CDS). In this paper, we propose a heuristic algorithm for pricing of basket default swaps (BDS). For this purpose, genetic network programming (GNP), which is one of the recent evolutiona...

In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issue...

When, based on the available information, an existing structure has an estimated failure probability above the admissible level, the default solution often is to either strengthen or replace it. Even if this practice is safe, it may not be the most economical. In order to economically restore and improve our existing infrastructure, the engineering community needs to be able to assess the poten...

Rating agencies claim to look through the cycle when assigning corporate credit ratings, which entails that they are able to separate trend components of default risk from transitory ones. To test whether agencies possess this competence, I take market-based estimates of one-year default probabilities of corporate bond issuers and estimate their long-run trend using the Hodrick-Prescott filter,...

We present an extension to the Gaussian copula model with jumps. We mix normal distributions which have negative means and small weights with the standard normal distribution in the Gaussian copula model to generate jumps in the default probability distribution for each underlying credit. The means and weights of the new normal distributions are used to control the size and intensity of the jum...