A1245
Title: Measuring default intensities through a reduced form credit risk approach
Authors: Ana Monteiro - University of Coimbra (Portugal) [presenting]
Rui Pascoal - University of Coimbra (Portugal)
Mario Augusto - FEUC and Institute of Systems and Robotics Coimbra (Portugal)
Abstract: The probability of default (PD) is a critical metric in credit risk analysis, representing the likelihood that a borrower will fail to fulfil their debt obligations. Estimating PD can be approached through structural or reduced-form models. The focus is on the estimation of default probabilities under the risk-neutral measure using the Jarrow/Turnbull model, a reduced-form approach, by applying it to both simulated and market data for some companies such as Apple and Beyond Meat. The objective is to extract valuable insights into market dynamics and the impact of historical events on credit risk. To derive relevant insights into bond dynamics, the analysis incorporates zero-coupon yields obtained through the Svensson approach, a method commonly employed by central banks to infer default-free zero-coupon bond prices. In addition, coupon maturities, cash flows and market bond prices are used for the cited companies, providing a comprehensive view of their respective credit spread term structures. The efficiency of the Jarrow/Turnbull models estimation method is first evaluated by comparing the discrepancies between estimated and simulated bond prices. Subsequently, the analysis extends to a comparative evaluation of the estimated default probabilities for the cited companies. The findings aim to enhance investors' understanding of the factors driving default risk, thereby enabling more informed decision-making in the bond market.
