TY - JOUR
T1 - Decoding Default Risk
T2 - A Review of Modeling Approaches, Findings, and Estimation Methods
AU - Bakshi, Gurdip
AU - Gao, Xiaohui
AU - Zhong, Zhaodong
N1 - Publisher Copyright: © 2022 by Annual Reviews.
PY - 2022/11/1
Y1 - 2022/11/1
N2 - Default risk permeates the behavior of corporate bond returns and spreads, credit default swap spreads, estimation of default probabilities, and loss in default. Pertinent to this review are salient empirical findings and implications of default process estimation from 1974 to 2021. Both structural and reduced-form models are covered. In structural models, default occurs if the value of assets falls below some threshold obligation. The reduced-form models involve assumptions about the default process combined with recovery in default. Default process estimation and measurements of default probability have improved by exploiting data on defaultable bonds, credit default swaps, tally of default realizations, and options on individual equities. Empirical investigations continue to address the relevance of stochastic asset volatility, jumps in asset values, and modeling of default boundary and firm leverage process.
AB - Default risk permeates the behavior of corporate bond returns and spreads, credit default swap spreads, estimation of default probabilities, and loss in default. Pertinent to this review are salient empirical findings and implications of default process estimation from 1974 to 2021. Both structural and reduced-form models are covered. In structural models, default occurs if the value of assets falls below some threshold obligation. The reduced-form models involve assumptions about the default process combined with recovery in default. Default process estimation and measurements of default probability have improved by exploiting data on defaultable bonds, credit default swaps, tally of default realizations, and options on individual equities. Empirical investigations continue to address the relevance of stochastic asset volatility, jumps in asset values, and modeling of default boundary and firm leverage process.
KW - Default
KW - default intensity-based credit risk models
KW - empirical facts in credit markets
KW - model estimation
KW - recovery in default
KW - structural models
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U2 - 10.1146/annurev-financial-111720-090709
DO - 10.1146/annurev-financial-111720-090709
M3 - Review article
SN - 1941-1367
VL - 14
SP - 391
EP - 413
JO - Annual Review of Financial Economics
JF - Annual Review of Financial Economics
ER -