Incremental Default Rate

Definition

The term Incremental Default Rate is used in the context of multi-period credit risk analysis to denote the empirical (or modelled) default rate observed in a certain portfolio during a defined sub-interval.

The incremental default rate can be considered as the building block of the Cumulative Default Rate. Observing whether an entity is defaulted over a period $[t_{k-1}, t_k]$, the incremental default rate is denoted $\mbox{IDR}_{k}$

Formula

The incremental default rate during period k, given an initial count of N₀, and an incremental default count of N_t^D is given by

$\mbox{IDR}_{t} = \frac{N^{D}_t}{N_0}$

NB: The important difference of this formula compared to the regular Default Rate expression is that the denominator refers to initial count of the portfolio / cohort

See Also

• For the relationship with the Incremental Default Probability, see Probability of Default versus Default Rate

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