Through-the-Cycle EDF Credit Measures
Moody's Analytics, August 2011
34 Pages Posted: 3 Sep 2011 Last revised: 15 Sep 2011
Date Written: August 30, 2011
Through-the-Cycle EDF (TTC EDF) credit measures are one-year probabilities of default that are largely free of the effect of the aggregate credit cycle, primarily reflecting a firm’s enduring, long-run credit risk trend. TTC EDF measures are useful in applications in which a stable PD input is desirable, and for which the expected cost of adjusting credit exposures as PD signals change outweighs the expected cost of negative credit events (such as default). Two examples of such applications are calculating regulatory capital and managing fixed income portfolios subject to credit quality triggers. In both examples, the cost of false positives is relatively high, while the cost of false negatives is relatively low. TTC EDF measures are derived from Moody’s Analytics’ public firm EDF model, the industry-leading structural credit risk model, through a filtering technique that separates the underlying components of EDF measures that correspond to the observed frequency of the credit cycle. TTC EDFs are available at a daily frequency for over 30,000 firms with traditional EDF measures in all geographic regions.
Keywords: default probability, through the cycle, required capital, Basel II
JEL Classification: G10, G21
Suggested Citation: Suggested Citation