Absorbing Default State
From Open Risk Manual
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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 is assumed to be absorbing, i.e., no re-emergence from this state.
- The indicator variable 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