Default Rate Process

Definition

Default Rate Process is any stochastic process that aims to model the arrival of default events in a Credit Portfolio

A default rate process is related to the corresponding Credit Loss Process which incorporates additional Loss Given Default considerations

Formula

A default rate process is modelled as the cumulation of individual transitions of Credit Rating into the defaulted state. The individual default indicator for an entity $i$ is simply

${\mbox{d}}_{k}^{i}=1_{\{R_{k}^{i}=D\}}$

where $R_{k}^{i}$ is the rating state at observation point k

The default rate process is the sum (defined on a fixed cohort basis) of individual random variables ${\mbox{d}}_{k}^{i}$

${\mbox{DR}}_{k}=\sum _{i=1}^{N}{\mbox{d}}_{k}^{i}$

See Also

• Default Rate Volatility

---