Bond Prices, Default Probabilities and Risk Premiums
11 Pages Posted: 11 Nov 2012
Date Written: March 9, 2005
A feature of credit markets is the large difference between probabilities of default calculated from historical data and probabilities of default implied from bond prices (or from credit default swaps). This paper illustrates and discusses the reasons for the difference between historical and risk neutral probabilities.
Keywords: risk-neutral default probabilities, historical default probabilities, credit default swaps
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