Measuring Expected Time to Default Under Stress Conditions for Corporate Loans
National Bank of Poland Working Paper No. 237
36 Pages Posted: 7 Jul 2016
Date Written: April 19, 2016
We present a new measure of extreme credit risk in the time domain, namely the conditional expected time to default (CETD). This measure has a clear interpretation and can be applied in a straightforward way to the analyses of loan performance in time. In contrast to the probability of default, CETD provides direct information on the timing of a potential loan default under some stress scenarios. We apply a novel method to compute CETD using Markov probability transition matrices, a popular approach in survival analysis literature. We employ the new measure to the analysis of changing credit risk in a large portfolio of corporate loans.
Keywords: credit risk, time to default, value at risk, conditional ETD
JEL Classification: G21, G32, C13, C18
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