Default Probabilities from Observed Rates and Spreads
1. Context
In this short video, we play around with observed yields (for risk-free and risky securities), and imply from them default probabilities for the risky security. These default probabilities can be conditional vs unconditional, cumulative vs marginal. The computations are done using binomial trees and risk-neutral valuations. The details of the reading in which this topic appears are given below:
| Area | Credit Risk |
| Reading | Spread Risk and Default Intensity Models |
| Reference | Allan Malz, Chapter 7. Spread Risk and Default Intensity Models In Financial Risk Management: Models, History, and Institutions, (Hoboken, NJ: John Wiley & Sons, 2011). |