# Default Rate Volatility

From Open Risk Manual

## Definition

**Default Rate Volatility** in the context of Credit Risk management denotes either

- the volatility of an empirically measured Credit Event realization rate (Default Rate) or
- the modelled (forecast) volatility of an underlying Default Rate Process.

The estimation or modelling of default rate volatility inherits the characteristics of the corresponding definition of default rate:

- The length of the time interval over which default events are cumulated (mathematically can also be continuous)
- Exposure versus Count based weighting of event rates
- Cohort based volatility versus Portfolio Run rate

## Estimation Formula

The default rate volatility is simply derived from the observed variance of the default rate process

## Volatility Models

In the context of a Credit Portfolio Model, the default rate volatility is a derived quantity, obtained from the Loss Distribution Function or related constructs

## See Also