Default Correlation
From Open Risk Manual
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Contents
Definition
Default Correlation denotes a measure of Default Dependency between different borrowers when considered as part of a Credit Portfolio. It measures the likelihood of Joint Default within the period of consideration.
Formula
Generic Default Correlation
The general formula for default correlation between two obligors is linking to the Joint Default probability:
where are is the Probability of Default of each obligor
From Default Rate Volatility
Given an estimate of Default Rate Volatility for a homogeneous credit portfolio, the average default correlation is[1]
See Also
References
- ↑ Credit Metrics Technical Document, 1997