@TechReport{dp-344,
  author        = {Weibach, Rafael and Sibbertsen, Philipp},
  astring       = {Rafael Weibach and Philipp Sibbertsen},
  title         = {Divergence of credit valuation in Germany - Continuous
                  theory and discrete practice -},
  month         = {August},
  year          = {2006},
  pages         = {19},
  size          = {216},
  number        = {344},
  language      = {en},
  keywords      = {Point process, credit valuation, hazard rate, kernel
                  smoothing test},
  jelclass      = {C19, C29},
  abstract      = {Lending is associated with credit risk. Modelling the loss
                  stochastically, the cost of credit risk is the expected
                  loss. In credit business the probability that the debtor
                  will default in payments within one year, often is the only
                  reliable quantitative parameter. Modelling the time to
                  default as continuous variable corresponds to an
                  exponential distribution. We calculate the expected loss of
                  a trade with several cash flows, even if the distribution
                  is not exponential. Continuous rating migration data show
                  that the exponential distribution is not adequate in
                  general. The distribution can be calibrated using rating
                  migrations without a parametric model. A practitioner,
                  however, will model time as a discrete variable. We show
                  that the expected loss in the discrete model is a linear
                  approximation of the expected loss in the continuous model
                  and discuss the consequences. Finally, as costs for the
                  expected loss cannot be charged up-front, the credit spread
                  over risk-free interest is derived.}
}