Difference between revisions of "Distance to Default"
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There is range of variations in how the concept can be used in credit risk modelling: | There is range of variations in how the concept can be used in credit risk modelling: | ||
* A strict interpretation that aims to derive the distance to default from market observables | * A strict interpretation that aims to derive the distance to default from market observables | ||
| − | * A looser intepretation that may use information from | + | * A looser intepretation that may use information from [[Financial Statements]] |
* As a functional transformation of diverse credit drivers, in particular in the context of [[Threshold Models]] | * As a functional transformation of diverse credit drivers, in particular in the context of [[Threshold Models]] | ||
Latest revision as of 14:23, 29 March 2021
Definition
Distance to Default is a central concept in Structural Credit Models where it denotes the degree to which the assets of a borrower (in particular in a corporate context) exceed the corresponding liabilities.
The concept originated with the work R. Merton[1]
Current Usage
There is range of variations in how the concept can be used in credit risk modelling:
- A strict interpretation that aims to derive the distance to default from market observables
- A looser intepretation that may use information from Financial Statements
- As a functional transformation of diverse credit drivers, in particular in the context of Threshold Models
References
- ↑ Merton RC. 1974. On the pricing of corporate debt: the risk structure of interest rates. J. Finance
