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Jarrow–Turnbull model

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The Jarrow–Turnbull model is a widely used "reduced-form" credit risk model. It was published in 1995 by Robert A. Jarrow and Stuart Turnbull. Under the model, which returns the corporate's probability of default, bankruptcy is modeled as a statistical process. The model extends the reduced-form model of Merton (1976) to a random interest rates framework.

Reduced-form models are an approach to credit risk modeling that contrasts sharply with "structural credit models", the best known of which is the Merton model of 1974. Reduced-form models focus on modeling the probability of default as a statistical process, whereas structural-models inhere a microeconomic model of the firm's capital structure, deriving the (single-period) probability of default from the random variation in the (unobservable) value of the firm's assets. Large financial institutions employ default models of both the structural and reduced-form types.

See also

References

  1. Robert A. Jarrow and Stuart Turnbull, "Pricing Derivatives on Financial Securities Subject to Credit Risk" Journal of Finance, vol. 50, March, 1995
  2. Robert Merton, “Option Pricing When Underlying Stock Returns are Discontinuous” Journal of Financial Economics, 3, January–March, 1976, pp. 125–44.
  3. Robert C. Merton “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance 29, 1974, pp. 449–470

Further reading

  • Duffie, Darrell; Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press.
  • Jarrow, Robert, Donald R. van Deventer, Li Li, and Mark Mesler (2006). Kamakura Risk Information Services Technical Guide, Version 4.1. Kamakura Corporation.{{cite book}}: CS1 maint: multiple names: authors list (link)
  • Lando, David (2004). Credit Risk Modeling: Theory and Applications. Princeton University Press. ISBN 978-0-691-08929-4.
  • van Deventer; Donald R.; Kenji Imai; Mark Mesler (2004). Advanced Financial Risk Management: Tools & Techniques for Integrated Credit Risk and Interest Rate Risk Modeling. John Wiley. ISBN 978-0-470-82126-8.
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