Resource title

The cost for the default of a loan : Linking theory and practice

Resource image

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Resource description

When calculating the cost of entering into a credit transaction the predominant stochastic component is the expected loss. Often in the credit business the one-year probability of default of the liable counterpart is the only reliable parameter. We use this probability to calculating the exact expected loss of trades with multiple cash ows. Assuming a constant hazard rate for the default time of the liable counterpart we show that the methodology used in practice is a linear Taylor approximation of our exact calculus. In a second stage we can generalize the calculation to arbitrary hazard rates for which we prove statistical evidence and develop an estimate from historical data.

Resource author

Philipp Sibbertsen, Rafael WeiƟbach

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/22545

Resource license

Adapt according to the presented license agreement and reference the original author.