Authors: Sibbertsen, Philipp
Weißbach, Rafael
Title: The Cost for the Default of a Loan - Linking Theory and Practice
Language (ISO): en
Abstract: When calculating the cost of entering into a credit transaction the predominant stochastic component is the expected loss. Often in the credit business the one-year probability of default of the liable counterpart is the only reliable parameter. We use this probability to calculating the exact expected loss of trades with multiple cash flows. Assuming a constant hazard rate for the default time of the liable counterpart we show that the methodology used in practice is a linear Taylor approximation of our exact calculus. In a second stage we can generalize the calculation to arbitrary hazard rates for which we prove statistical evidence and develop an estimate from historical data.
URI: http://hdl.handle.net/2003/4904
http://dx.doi.org/10.17877/DE290R-15021
Issue Date: 2004
Publisher: Universitätsbibliothek Dortmund
Appears in Collections:Sonderforschungsbereich (SFB) 475

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