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Do changes in distance-to-default anticipate changes in the credit rating?

  • Nidhi Aggarwal

    (Indira Gandhi Institute of Development Research)

  • Manish Singh

    (Indira Gandhi Institute of Development Research)

  • Susan Thomas


    (Indira Gandhi Institute of Development Research)

Distance-to-default (DtD) from the Merton model has been used in the credit risk literature, most successfully as an input into reduced form models for forecasting default. In this paper, we suggest that the change in the DtD is informative for predicting change in the credit rating. This is directly useful for situations where forecasts of credit rating changes are required. More generally, it contributes to our knowledge about reduced form models of credit risk.

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Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2012-010.

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Length: 31 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:ind:igiwpp:2012-010
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  1. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2006. "In Search of Distress Risk," NBER Working Papers 12362, National Bureau of Economic Research, Inc.
  2. Gianluca Oderda & Michel M. Dacorogna & Tobias Jung, 2003. "Credit Risk Models - Do They Deliver Their Promises? A Quantitative Assessment," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(2), pages 177-195, 07.
  3. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 0150, European Central Bank.
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