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

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