Credit Risk [30]

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Bullet points include: Statistical implementation can be more or less ‘pure’. Although commercial implementations not usually very pure! For example: Estimate standard deviation of log differenced equity values log(Xt+1/Xt). Derive underlying volatility of kj,t bearing in mind that it is ratio of Vj,t to Dj,t. Having estimated parameters for each firm’s equity-debt ratio, derive time series kj,t for each firm. Using log differences of kj,t estimate correlation matrix between firms. Simulate and repeat many times as per Monte Carlo

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