Absorbing Default State
From Open Risk Manual
- The defaulted state is assumed to be absorbing, i.e., no re-emergence from this state.
- The indicator variable 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