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Frailty Correlated Default

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Author Info

  • Darrell DUFFIE

    (Stanford University)

  • Andreas ECKNER

    (Stanford University)

  • Guillaume HOREL

    (Stanford University)

  • Leandro SAITA

    (Lehman Brothers)

Abstract

We analyze portfolio credit risk in light of dynamic “frailty,” by which the credit qualities of different firms depend on common unobservable time-varying default covariates. Frailty is estimated to have a large impact on estimated conditional mean default rates, above and beyond those predicted by observable factors, and to cause a large increase in the likelihood of large default losses for portfolios of U.S. corporate bonds during 1980-2004.

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File URL: http://ssrn.com/abstract=1314771
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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-44.

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Length: 53 pages
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Handle: RePEc:chf:rpseri:rp0844

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: correlated default; doubly stochastic; frailty; latent factor.;

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