Default Intensity

From Open Risk Manual

Definition

A Default Intensity is any function of the form \Lambda(X_t , \beta), where:

  • X_t is a list of
    • firm-specific and macroeconomic default covariates, some of which might suggested by structural theories,
    • unobservable covariates, and
  • \Lambda(X_t , \beta) is an ad-hoc function, not necessarily based on a theory of the firm, depending on a parameter vector \beta to be estimated.


In the context of Credit Risk modelling the default intensity denotes the rate of default at any time assuming the obligor has survived up to that point. It is closely related to the concept of a Hazard Rate, with the intensity name being used more widely in the context of probability / stochastic models literature[1] and the hazard rate being used more widely in the context of statistical literature and survival analysis.

See Also

References

  1. D.Duffie, Measuring Corporate Default Risk, Clarendon Lectures in Finance, 2010

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