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Financial Modelling - Essay Example
Finance & Accounting
Pages 8 (2008 words)
Probability of default Name: Institution: Probability of default Banks consider credit risks, a dominant source of risk and hence the banks subject it to strict oversight. Additionally, credit risks remain one of the central topics in financial policy debates…
This paper models an approach for estimation of the probability of default (PD) using publicly available information. It borrows from past research to develop an analytical approach and explore the provided data sample. Regulators are conventionally not the single constituency of individuals interested in PD estimate properties. Typically, PDs are products of credit asset pricings, from bonds, loans, as well as sophisticated instruments including credit derivatives. These are often needed for successful risk management. According to (DDDDD), default is however considered a rare event, more particularly, for high credit quality firms which constitute a bulk of huge corporate segment in any of the big banks. However, PDs can systematically vary with business cycle and hence unlike to remain stable over time. In this report, a number of factors are identified, factor which shape or rather act as determinants of probability of default. These include price to book ratio, age of firm, region where firm is located, firm’s sector, debt ratio, and size of the firms. According to Freedman (2005) regression analysis includes modeling and analysis of variables, with special focus on the relationship between a dependent variable and a set of independent variables. Its helps a researcher establish how the dependent variable is alters when one or more of the dependent variable is varied. ...
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