A Forward-Looking Measure of Credit Risk

22 Pages Posted: 17 Jul 2019 Last revised: 27 Jun 2023

See all articles by Masahiko Egami

Masahiko Egami

Kyoto University

Rusudan Kevkhishvili

Graduate School of Economics, Kyoto University

Date Written: June 27, 2023

Abstract

In this article, we demonstrate that the asset model incorporating the cumulative effect of negative shocks through a shot noise process detects deteriorated credit quality earlier than the benchmark Merton-type model. We provide mathematical proofs which illustrate the mechanism behind this forward-looking feature. The asset model with a shot noise is a computationally simple extension of the benchmark model. We use the CDS market to exemplify how this model detects high credit risk in a forward-looking manner.

Keywords: asset process, shot noise, distance-to-default, structural model, credit risk, CDS spread

JEL Classification: G01, G17, G32

Suggested Citation

Egami, Masahiko and Kevkhishvili, Rusudan, A Forward-Looking Measure of Credit Risk (June 27, 2023). Available at SSRN: https://ssrn.com/abstract=3420656 or http://dx.doi.org/10.2139/ssrn.3420656

Masahiko Egami

Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Rusudan Kevkhishvili (Contact Author)

Graduate School of Economics, Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

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