Macro-economy in models for default probability.

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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: English
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C65 - Miscellaneous Mathematical Tools; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General

References

[1] X. An, Macroeconomic conditions, systematic risk factors, and time series dynamics of commercial mortgage credit risk, Preprint (2007) University Southern California, USA.

[2] M. Hillebrand, Modeling and estimating loss given default, Preprint(2006) University Munchen, Germany.

[3] P.A. Samuelson, Foundations of Economic Analysis, (1975), p 548-561 Harvard University Press Camb. Mass., USA.

[4] A. Kreinin, A. Nagi, Calibration of the default probability model, European Journal of Operational Research (2006), doi: 10.1016/j.eor.2004.11.029.

[5] A.D. Polyani, Linear Wave Equation (2004), http://eqworld.ipmnet.ru/en/solutions/lpde/lpde201.pdf