Absorbing Default State

From Open Risk Manual

Definition

In the context of a Credit Rating Scale used within a Credit Network model, an Absorbing Default State is a type or rating state from which the borrower / debtor will never recover (cure).

Usage

  • The defaulted state R_k^i=D is assumed to be absorbing, i.e., no re-emergence from this state.
  • The indicator variable 1_{\{ R_k^i = D\}} encodes whether a name has defaulted at observation time k.

Issues and Challenges

When zeroing-in in Non-Performing Loan dynamics, credit states exhibit considerable complexity. A default event need to be final but may be followed by migration back into good standing (performing) at a specified Cure Rate


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