Distance to Default

From Open Risk Manual

Definition

Distance to Default is a central concept in Structural Credit Models where it denotes the degree to which the assets of a borrower (in particular in a corporate context) exceed the corresponding liabilities.

The concept originated with the work R. Merton[1]

Current Usage

There is range of variations in how the concept can be used in credit risk modelling:

  • A strict interpretation that aims to derive the distance to default from market observables
  • A looser intepretation that may use information from financial statements
  • As a functional transformation of diverse credit drivers, in particular in the context of Threshold Models

References

  1. Merton RC. 1974. On the pricing of corporate debt: the risk structure of interest rates. J. Finance

Contributors to this article

» Wiki admin