Keywords: Default correlation, first-passage-time
Abstract: Evaluating default correlations and the probabilities of multiple
defaults is an important task in credit analysis and risk management,
but it has never been an easy one because default correlations cannot
be measured directly. This paper provides, for the first time, an
analytical formula for calculating default correlations based on a
first-passage-time model that can be easily implemented and
conveniently used in a variety of financial applications. This paper
also provides a theoretical justification for many empirical results
found in the literature and increases our understanding of the
important features of default correlations.
Full paper (245 KB PDF)
| Full paper (243 KB Postscript)
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Last update: July 16, 1997