ACTSC445 Study Guide - Final Guide: Credit Risk, Actuarial Science, Threshold Model

• School: University of Waterloo
• Department: Actuarial Science
• Course: ACTSC445
• Professor: Jiahua Chen

Document Summary

Department of statistics and actuarial science, university of waterloo. We"ll quickly discuss li"s model and present some numerical results indicating one of the drawbacks of this model, and conclude with a short discussion of how some of the basel ii regulations are related to these models. Hence we have at = et + bt, 0 t t . For the debt, we assume that the rm issues at time 0 a bond with face value l and maturity. At = a0e( 2/2)t+ wt where wt n (0, t) represents the value of a brownian motion at time t. this means we assume the return on the rm"s asset value is lognormally distributed. 2 model like this, we can compute quantities such as. P (default) = p (at l) = p (ln at ln l) = p (cid:18)n (0, 1) ln l ln a0 ( 2/2)t (cid:19) (1)