Working Papers, Department of Economics, Lund University
No 2003:14:
A Simple Continuous Measure of Credit Risk
Hans Byström ()
and Oh Kang Kwon ()
Abstract: This paper introduces a simple continuous measure of
credit risk that associates to each firm a risk parameter related to the
firm's risk-neutral default intensity. These parameters can be computed
from quoted bond prices and allow assignment of credit ratings much finer
than those provided by various rating agencies. We estimate the risk
measures on a daily basis for a sample of US firms and compare them with
the corresponding ratings provided by Moody's and the distance to default
measures calculated using the Merton (1974) model. The three measures group
the sample of firms into various risk classes in a similar but far from
identical way, possibly reflecting the models' different forecasting
horizons. Among the three measures, the highest rank correlation is found
between our continuous measure and Moody's ratings. The techniques in this
paper can be used to extract the entire distribution of inter-temporal
risk-neutral default intensities which is useful for time-to-default
estimations as well as for pricing credit derivatives.
Keywords: credit risk; credit rating; corporate bonds; (follow links to similar papers)
JEL-Codes: G14; G33; (follow links to similar papers)
18 pages, October 24, 2003, Revised January 18, 2005
Download Statistics
- This paper is published as:
-
Byström, Hans and Oh Kang Kwon, (2007), 'A Simple Continuous Measure of Credit Risk', International Review of Financial Analysis, Vol. 16, No. 5, pages 508-523
Questions (including download problems) about the papers in this series should be directed to David Edgerton ()
Report other problems with accessing this service to Sune Karlsson ()
or Björn Thodenius ().
Programing by
Design by Joachim Ekebom
