Trailing Twelve Month Default Rate

From Open Risk Manual

Definition

Trailing Twelve Month Default Rate (TTM) denotes the empirically measured Credit Event realization rate over a consecutive period of 12 months (which does not necessarily coincide with a calendar year).

Usage

The TTM default rate is defined in analogy with more general [wikipedia:Trailing twelve months Trailing twelve months] analysis of Timeseries Data. The time period over which default events are cumulated in order to produce this rate is one year. In contrast to the Long-run Default Rate or default rate estimates based on calendar years, the TTM default rate aims to capture the dynamics (time evolution) of the default rate and identify Default Rate Volatility

Formula

For suitably defined total count/exposure Nt at the beginning of the 12 month period and defaulted NtD count/exposure at the end of the period, the TTM default rate is simply the ratio


\mbox{TTM DR}_{t} = \frac{N^{D}_t}{N_t}


Issues and Challenges

  • For the various choices and considerations in measuring default rates in general, see the Default Rate entry.