Frailty Correlated Default
53 Pages Posted: 23 Dec 2008
Date Written: October 19, 2006
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
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