Understanding Default Risk Through Nonparametric Intensity Estimation
AbstractThis paper investigates instantaneous probabilities of default implied by rating and default events. We propose and apply an alternative measurement approach to standard cohort and homogenous hazard estimators. Our estimator is a smooth nonparametric estimator of intensities, free of bias and unambiguously more accurate. It also avoids the Markovian framework and takes care of censoring. Using Standard & Poor’s ratings database we then show that intensities vary both with respect to calendar time and ageing time. We deeper investigate the behaviour of through-the-cycle default probabilities, update and complement knowledge on documented non Markovian patterns. Results do not support associated timeliness problems but indicate a low reactivity of ratings in terms of magnitude. Because of their target horizon, they indeed integrate the mean reverting feature of default intensities.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp141.
Date of creation: Mar 2005
Date of revision:
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default intensity; hazard estimation; censored duration; non Markovian framework; through-the-cycle ratings;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-14 (All new papers)
- NEP-BEC-2005-05-14 (Business Economics)
- NEP-FIN-2005-05-14 (Finance)
- NEP-RMG-2005-05-14 (Risk Management)
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