Munich Personal RePEc Archive

Default Forecasting and Credit Valuation Adjustment

Lee, David (2023): Default Forecasting and Credit Valuation Adjustment.

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Credit valuation adjustment has acquired a great deal of attention from both theoreticians and practitioners in recent years. This paper presents a model for default forecasting and credit valuation adjustment. The model links distance-to-default, default probability, survival probability, default correlation, and risky valuation together. It captures default risk, credit migration, and wrong way risk simultaneously and naturally. The numerical study shows that the model implied credit spreads and default correlations are very close to the market observed ones, indicating that the model performs quite well. The results may be of interest to regulators, academics, and practitioners.

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