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Macro-economy in models for default probability

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  • Geurdes, Han / J.F.

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.

Suggested Citation

  • Geurdes, Han / J.F., 2011. "Macro-economy in models for default probability," MPRA Paper 32666, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:32666
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    Keywords

    English;

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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