Munich Personal RePEc Archive

Macro-economy in models for default probability.

Geurdes, Han / J.F. (2011): Macro-economy in models for default probability.

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Abstract

We inspect the question how to adapt to macro-economical variables those probability of default (PD) estimates where Merton's model assumptions cannot be used. The need for this is to obtain trustworthy estimates of PD from a given economical situation. The structure of a known market-credit risk model is adapted. The key concept in this adaptation is the assumption of a different probabilistic situation for a firm before and at (first) default. If a corporate firm defaults we use a different probabilistic relation between macro-economical and market risk than in a firm's normal not default operation. We found a remarkable resemblance between relativity of physical space-time and the economical framework of variables. This means a solution of the calibration problem without using a Gaussian distribution estimates of the default probability.

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