Difference between revisions of "Marginal Default Probability"
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== Definition == | == Definition == | ||
− | The term '''Marginal Default Probability''' is used in the context of multi-period | + | The term '''Marginal Default Probability''' is used in the context of multi-period [[Credit Risk]] analysis to denote the likelihood that a [[Legal Entity]] is observed to experience a [[Credit Event]] during a defined period of time (hence conditional on not having defaulted prior to that period). |
The marginal default probability <math>h_k</math> is identical in meaning with the [[Hazard Rate]]. | The marginal default probability <math>h_k</math> is identical in meaning with the [[Hazard Rate]]. | ||
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== Relationships with related measures == | == Relationships with related measures == | ||
− | + | * In terms of the [[Incremental Default Probability]] we have <math>h_k = p_k / (1 - q_{k-1}) </math> where <math>p_k</math> is the incremental default probability during period <math>[t_{k-1}, t_k]</math>. | |
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− | * In terms of the [[Incremental Default Probability]] we have <math>h_k = p_k / (1 - q_{k-1}) </math> where <math>p_k</math> is the incremental default probability during period <math>[t_{k-1}, t_k]</math>. | ||
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== Issues and Challenges == | == Issues and Challenges == |
Latest revision as of 11:36, 31 March 2021
Definition
The term Marginal Default Probability is used in the context of multi-period Credit Risk analysis to denote the likelihood that a Legal Entity is observed to experience a Credit Event during a defined period of time (hence conditional on not having defaulted prior to that period).
The marginal default probability is identical in meaning with the Hazard Rate.
- In terms of the Incremental Default Probability we have where is the incremental default probability during period .
Issues and Challenges
- It is important to distinguish the marginal default probability from the Incremental Default Probability which measures the observed default rate during a given period without conditioning on no default prior to the current period.