@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.}
}