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Measuring credit risk by using a parameterized model under risk-neutral measure

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  • Su-Lien Lu

Abstract

This article assesses credit risk by using a parameterized model under risk-neutral measure, elaborating the assumption of Byström and Kwon (2007) by using interpolation to estimate the risk-free yield curve. The required data are minimal; the proposed model only necessitates information regarding loans, such as loan rates, and risk-free rates that can avoid shortcomings of rating data. The default probabilities are estimated under risk-neutral measure though few studies have done so. The empirical results show that default probabilities of financial distress are higher compared to those of normal firms. Furthermore, the proposed model is also closely associated with the economic state.

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  • Su-Lien Lu, 2013. "Measuring credit risk by using a parameterized model under risk-neutral measure," Applied Economics Letters, Taylor & Francis Journals, vol. 20(8), pages 719-723, May.
    • Handle: RePEc:taf:apeclt:v:20:y:2013:i:8:p:719-723
    DOI: 10.1080/13504851.2012.734593
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    1. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Jia-wen Zhang & Long-hui Chen & Xiang-yun Liu & Fen Ding, 2014. "Measurement of Credit Risk of Small and Medium-sized S&T Enterprises in China," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 5(4), pages 21-31, July.

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