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Frailty Correlated Default

Author

Listed:
  • 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.

Suggested Citation

  • Darrell DUFFIE & Andreas ECKNER & Guillaume HOREL & Leandro SAITA, "undated". "Frailty Correlated Default," Swiss Finance Institute Research Paper Series 08-44, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0844
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    File URL: http://ssrn.com/abstract=1314771
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    Keywords

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

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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