Absorbing Default State

Definition

In the context of a Credit Rating Scale used within a Credit Network model, an Absorbing Default State is a type or rating state from which the borrower / debtor will never recover (cure).

Usage

• The defaulted state $R_k^i=D$ is assumed to be absorbing, i.e., no re-emergence from this state.
• The indicator variable $1_{\{ R_k^i = D\}}$ encodes whether a name has defaulted at observation time k.

Issues and Challenges

When zeroing-in in Non-Performing Loan dynamics, credit states exhibit considerable complexity. A default event need to be final but may be followed by migration back into good standing (performing) at a specified Cure Rate

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