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Distance to Default and Credit Valuation Adjustment

Author

Listed:
  • David Lee

    (BMO)

Abstract

Distance to default is an essential measure of credit risk and is widely used for determining default risk, rating migration, and rating risk. This paper presents a new approach to model credit risk via distance to default. The model provides an integrated view of credit valuation adjustment by linking distance-todefault, default probability, survival probability, default correlation, and risky valuation together. The numerical study shows that the model results are very close to the market observations, indicating that the model is quite accurate. The numerical results corroborate the theoretical prediction on credit spreads and default correlations.

Suggested Citation

  • David Lee, 2023. "Distance to Default and Credit Valuation Adjustment," Working Papers hal-04208831, HAL.
    • Handle: RePEc:hal:wpaper:hal-04208831
    Note: View the original document on HAL open archive server: https://hal.science/hal-04208831
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    File URL: https://hal.science/hal-04208831/document
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    More about this item

    Keywords

    credit value adjustment (CVA) credit risk modeling distance to default default probability survival probability asset pricing involving credit risk JEL Classification: E44 G21 G12 G24 G32 G33 G18 G28; credit value adjustment (CVA); credit risk modeling; distance to default; default probability; survival probability; asset pricing involving credit risk JEL Classification: E44; G21; G12; G24; G32; G33; G18; G28;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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