Calibration of the default probability model |
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Authors: | Alexander Kreinin Ahmed Nagi |
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Affiliation: | Algorithmics Inc., 185 Spadina Avenue, Toronto, Ont., Canada M5T 2C6 |
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Abstract: | In this paper, we study the calibration problem for the Merton–Vasicek default probability model [Robert Merton, On the pricing of corporate debt: the risk structure of interest rate, Journal of Finance 29 (1974) 449–470]. We derive conditions that guarantee existence and uniqueness of the solution. Using analytical properties of the model, we propose a fast calibration procedure for the conditional default probability model in the integrated market and credit risk framework. Our solution allows one to avoid numerical integration problems as well as problems related to the numerical solution of the nonlinear equations. |
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Keywords: | Credit risk Default probability Merton&ndash Vasicek model Calibration |
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