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Frailty Correlated Default

53 Pages Posted: 23 Dec 2008  

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Guillaume Horel

Stanford University - Department of Statistics; Merrill Lynch & Co.

Leandro Saita

Independent

Andreas Eckner

Stanford University

Date Written: October 19, 2006

Abstract

We analyze portfolio credit risk in light of dynamic "frailty," by which the credit qualities of different firms depend on common unobservable time-varying default covariates. Frailty is estimated to have a large impact on estimated conditional mean default rates, above and beyond those predicted by observable factors, and to cause a large increase in the likelihood of large default losses for portfolios of U.S. corporate bonds during 1980-2004.

Keywords: correlated default, doubly stochastic, frailty, latent factor

JEL Classification: C11, C15, C41, E44, G33

Suggested Citation

Duffie, Darrell and Horel, Guillaume and Saita, Leandro and Eckner, Andreas, Frailty Correlated Default (October 19, 2006). Swiss Finance Institute Research Paper No. 08-44. Available at SSRN: https://ssrn.com/abstract=1314771 or http://dx.doi.org/10.2139/ssrn.1314771

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
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650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Guillaume Horel

Stanford University - Department of Statistics ( email )

Stanford, CA 94305
United States

Merrill Lynch & Co. ( email )

World Financial Center - North Tower
19th Floor
New York, NY 10281-1319
United States

Leandro Saita

Independent

No Address Available

Andreas Eckner

Stanford University ( email )

Stanford, CA 94305
United States

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