 Abstract:
Since credit risk valuation attempts to quantify firms default risk, we propose to apply one alternative approach of fault tree, or equivalently, reliability study to assess firms’ default risk. We set a very simple framework and use French firms’ bankruptcy Statistics
to quantify default probabilities. From these empirical default probabilities and under the assumption that the lifetime process follows an exponential law with a constant parameter, we estimate this constant parameter for French sectors. Each parameter’s estimation corresponds to the related hazard rate on the time horizon under consideration. Indeed, each exponential law’s parameter is a convex decreasing function of time. Whatever, such an approach may be useful to give a statistical benchmark for common credit risk models’ improvement.
Authors:
Hayette GATFAOUI
JEL classification:
C1 D8
Keywords:
Credit risk, default probability, failure rate, fault tree, reliability, survival
Download locations
The Icfai University Journal of Risk & Insurance
http://www.iupindia.org/106/ijri.asp
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